"What’s Your Fraud IQ?
Think you know enough about corruption to spot it in any of its myriad
forms? Then rev up your fraud detection radar and take this (deceptively)
simple test." by Joseph T. Wells, Journal of Accountancy, July 2006
---
http://www.aicpa.org/pubs/jofa/jul2006/wells.htm

"I don't see frankly much out there that really does
the job, and that's partially because investors are their own worst enemy," says
former SEC Chairman Arthur Levitt. "They refuse to invest skeptically, and are
too easily seduced by all the purveyors of financial products that prey upon
their worst instincts." "Investor Education 101: How to Avoid Scams: Outreach Programs
Target Most-Vulnerable Americans, But Success Is Hard to Assess," By Lynn
Cowan, The Wall Street Journal, May 9, 2006; Page D3 ---
http://online.wsj.com/article/SB114713241888747241.html?mod=todays_us_personal_journal

An onslaught of investor education is being
unleashed, thanks to an ever-growing stockpile of money set aside for this
purpose by regulators.

Senior-citizen investors being preyed upon? The
nonprofit Investor Protection Trust is financing a Florida state program
that teaches retirees to identify and report suspected scams.

Auto workers receiving lump-sum retirement buyouts
in coming months? There is a new Securities and Exchange Commission
publication that warns that they could be prime targets for fraud.

There seems to be no end to the list of
publications, public-service announcements and seminars being funded in the
wake of a landmark settlement in 2003 between regulators and Wall Street
over stock analysts' conflicts of interest. The settlement provided $80
million in investor-education funds, and regulators add to that amount every
year with more penalties for new securities-industry transgressions.

Unfortunately, there's also a seemingly infinite
trove of outright hucksters and smooth marketing materials bombarding
investors every day, say regulators and observers. And no one knows how
effective investor-education programs are in combating them.

"I don't see frankly much out there that really
does the job, and that's partially because investors are their own worst
enemy," says former SEC Chairman Arthur Levitt. "They refuse to invest
skeptically, and are too easily seduced by all the purveyors of financial
products that prey upon their worst instincts."

There's also little information available about
what kinds of programs really work to educate and protect investors.
Regulators and investor-education specialists say they are working hard to
expand their materials beyond brochures with basic information to encompass
interactive games for students, television programs and in-person seminars.

But regulators add that they are also fighting
against strong forces in their battle to educate and protect investors from
scam artists, their own emotions and a legacy of conflicts of interest in
the brokerage industry.

Scam artists are the most easily identified
investor-protection issue: Often organized in pyramid, or "Ponzi,"
structures, the schemes promise outsized returns and can exist for years
before collapsing. Investor-protection programs can easily focus on warning
about this kind of threat because it has some obvious hallmarks.

Regulators' second villain is trickier: investors'
own inertia and greed. Getting most people in the U.S. to learn the basics
of a careful investing strategy is akin to asking them to read a legal
footnote, but there is no shortage of people willing to sign up for the
chance to earn 130% on ersatz securities.

Possibly the most innovative investor-education
program in existence today targets investors who are drawn to these
get-rich-quick scams. The SEC runs several Web sites that pose as can't-fail
investment schemes. One,growthventure.com,
outlines the business dealings of a fake
construction-supply company, Growth Venture, which invites viewers to invest
and receive returns of 350% a year. Anyone falling for the bait is linked to
an SEC page that gently chides them and describes how to avoid scams.

But such educational tools aren't as easy to
construct for one of the thorniest issues facing investor-education
programs: teaching people about protecting themselves in daily interactions
with the legitimate brokerage industry.

Although larger Ponzi scams, such as the Financial
Advisory Consultants bust in California in 2004, are headlined for bilking
investors out of as much as $300 million, industry wide brokerage scandals
involving well-known firms have surpassed $1 billion apiece. From Prudential
Securities' abusive sales of limited partnerships in the early 1990s to the
conflicts of interest in analyst research in the late 1990s, major Wall
Street firms appear to be struggling with improper systematic conduct every
decade.

Yet investor educators often express concern about
finding the right balance between warning investors and condemning a highly
regulated industry that provides legitimate advice and services.

Continued in article

Jensen Comment
Also be careful what mutual fund or brokerage firm you deal with. My advice is
to avoid high-commission brokerage firms. My advice is to also compare the
mutual fund expense rates with benchmark rates of Vangaard and Fidelity.

Rule 02: The world won't care about your self-esteem. The world will expect
you to accomplish something BEFORE you feel good about yourself.

Rule 03: You will NOT make $60,000 a year right out of high school. You won't
be a vice-president with backdated stock options until you earn both.

Rule 04: If you think your teacher is tough, wait till you get a boss.

Rule 05: Flipping burgers is not beneath your dignity. Your Grandparents had
a different word for burger flipping: they called it opportunity.

Rule 06: If you mess up, it's not your parents' fault, so don't whine about
your mistakes, learn from them.

Rule 07: Before you were born, your parents weren't as boring as they are
now. They got that way from paying your bills, cleaning your clothes and
listening to you talk about how cool you thought you were. So before you save
the rain forest from the parasites of your parent's generation, try delousing
the closet in your own room.

Rule 08: Your school may have done away with winners and losers, but life HAS
NOT. In some schools, they have abolished failing grades and they'll give you as
MANY TIMES as you want to get the right answer. This doesn't bear the slightest
resemblance to ANYTHING in real life.

Rule 09: Life is not divided into semesters. You don't get summers off and
very few employers are interested in helping you FIND YOURSELF. Do that on your
own time.

Rule 10: Television is NOT real life. In real life, people actually have to
leave the coffee shop and go to jobs.

Rule 11: Be nice to nerds. Chances are you'll end up working for one.

Added by Jensen
Rule 12: Faking Disability is About as Low as It Gets
Don't fake disability in order to live out the rest of your life without
working. Some who tried went to jail and paid heavy fines according to Michael
Crowley, "Faking It: We all pay the price when 'disabled' scam artists
collect big benefit bucks," Readers Digest, October 2006, pp. 27-29. One
of the scammers named Denise Hendersen conned the system for while becoming a
winner the 2001 Mrs. International pageant which later entailed over 200 public
appearances. She got caught toting heavy shopping bags and diving on a Hawaiian
vacation. She not only had to repay the $190,000 of disability benefits
collected, she received a 46-month prison sentence. She's now thinking she's not
so clever.

The Investment Banker Who Got Away to Start Another DayThe(Frank Quattrone) deal marks the end of a sorry chapter in American business
history. While high-profile white-collar crime persists, the dramatic criminal
cases that were launched just after the dotcom economy fizzled are now mostly
completed. The icons of massive, turn-of-the-century corporate fraud--Ken Lay
and Jeff Skilling of Enron, Bernie Ebbers of WorldCom, Dennis Kozlowski and Mark
Swartz of Tyco--are convicted and, in Lay's case, dead. Even Martha Stewart has
served time. And many, if not most, of the cases the feds brought against
smaller fish--to help assuage a share-owning public that had been scammed by
phony accounting and overhyped stock--are resolved. The government claims that
since mid-2002 it has won more than 1,000 corporate-fraud convictions, including
those of more than 100 CEOs and presidents.
Barbara Kiviat, "The One Who Got Away: The decision to abandon a
high-profile case against a dotcom poster boy marks the end of a sorry era,"
Time Magazine, August 27, 2006 ---
Click Here

Mr. Quattrone's rise shows
how some who were on the inside during the tech boom piled up huge
fortunes in part through special access, unavailable to other
investors, to the machinery of that era's frenzied stock market. But
now he faces a crunch. The steep yearlong downturn in tech stocks has
hurt the profits of his technology group. And in recent weeks, the
group he heads has come under scrutiny in connection with a federal
probe into whether some investment-bank employees awarded shares of
hot IPOs in exchange for unusually high commissions, and whether those
commissions amounted to kickbacks.
Susan Pulliam and Randall Smith, The Wall Street Journal, May
3, 2003 --- http://online.wsj.com/article/0,,SB988836228231147483,00.html?mod=2_1040_1

"Counterfeit News," by David Frum, Canadian National Post, August 26,
2006 --- Click
Here

"A Lebanese man counts U.S dollar bills received
from Hizbollah members in a school in Bourj el-Barajneh, a southern suburb
of Beirut, August 19, 2006. Hizbollah handed out bundles of cash on Friday
to people whose homes were wrecked by Israeli bombing, consolidating the
Iranian-backed group's support among Lebanon's Shiites and embarrassing the
Beirut government. REUTERS/Eric Gaillard (LEBANON)"

This scene and dozens more like it flashed around
the planet. Only one thing was missing -- the thin wire security strip that
runs from top to bottom of a genuine US$100 bill. The money Hezbollah was
passing was counterfeit, as should have been evident to anybody who studied
the photographs with due care.

Care was due because of Hezbollah's history of
counterfeiting: In June, 2004, the U.S. Department of the Treasury publicly
cited Hezbollah as one of the planet's leading forgers of U.S. currency.

But this knowledge was disregarded by the news
organizations who queued up to publicize
Hezbollah's pseudo-philanthropy. The passing of counterfeit bills was
detected not by the reporters and photographers on the spot, but by bloggers
thousands of miles away: SnappedShots.com, MyPetJawa and Charles Johnson's
Little Green Footballs. These sites magnified photographs and showed them to
currency experts and detected irregularity after irregularity in the bills.
(Links to all the sites mentioned here can be found at
www.frum.nationalreview.com )

The FCC ScandalMedia policy-making, with its overwhelming bias
toward corporate consolidation, dumbed-down content and bottom-line
decision-making, has been properly described for some time as "scandalous."
Now the quotation marks can be removed; the scandal is official. In
September came revelations that Federal Communications Commission officials
had, since 2003, blocked the release of major reports that showed the danger
of allowing a handful of media conglomerates to control communications. The
suppression of the reports dramatically illustrates how an agency charged
with protecting the public interest instead does the bidding of the
telecommunications corporations it should regulate. One report found that
locally owned television stations provide 20 percent more local news than
stations owned by the broadcast behemoths. Another detailed a 35 percent
drop in the number of independently owned radio stations following the
removal of most ownership caps by the 1996 Telecommunications Act. Taken
together, the reports make a powerful argument against moves by the Bush
Administration and the FCC's Republican majority to further undermine
ownership limits.
John Nichols, "The FCC Scandal," The Nation, September 28, 2006 ---
http://www.thenation.com/docprem.mhtml?i=20061016&s=nichols

As we
approach another academic year, I want to remind professors of the following
fraud that is somewhat commonplace in academe, fraud exacerbated by the need
to pad annual performance reports and resumes.

I love it when jokesters intentionally submit utter
nonsense, albeit clever nonsense, that passes through the pretense of having
acceptance/rejection filters by some conference sponsors who in reality accept
virtually every submission.

The average American consumer/homeowner has
little to no chance of getting an honest or fairly priced mortgage in
today's double standard, murky mortgage environment. That is if you are
a consumer/homeowner attempting to discover what is fair from a mortgage
fee/interst rate pricing standpoint and what is not. As a result The
Homeowners Consumer Center & its partner The Mortgage Inspection Service
are recruiting honest mortgage brokers/lenders who are ready to compete
in their local markets with an honest approach in working with
consumers/homeowners.

(PRWEB) May 31, 2006 -- The Homeowners Consumer
Center (Http://www.HomeownersConsumerCenter.Com)
along with its partner the Mortgage Inspection
service (Http://www.MortgageInspectionService.com)
have called for a national consumer alert to all
homeowners about the realities of the current US mortgage market, in the
form of five critical consumer tips they need to know. At the same time
the Homeowners Consumer Center is seeking information about locally
owned mortgage firms/lenders that are tired of trying to compete against
dishonest mortgage lenders. The targets of this campaign are as follow:

1. TV Pitchmen promising consumers/homeowners they will get numerous
mortgage firms to compete for a mortgage deal, or that someone should
have called so and so. The problem; the sales pitch does not always
measure up to what the consumer actually gets ( a much higher than
market interest rate, ridiculous fees or both).

These same types of ads often times say, or talk about a "no point"
gimmick, which is not exactly "no fees", if you are a consumer. The
actual translation is the consumer just got a higher interest rate and a
higher monthly mortgage payment.

2. National Homebuilders in many to most cases exclude borrowers from
getting a competitive quote from local mortgage lenders. Typically the
homebuilder prices the home buyers mortgage products 25 to 125 basis
points over par (par=the best available interest rate for the borrower)
and frequently these transactions are loaded with junk mortgage fees. If
the borrower wants to get a competitive quote he/she or they get told, "
the house will cost more", or they will not get a "bonus". What the
homebuilder failed to tell the consumer is that because they are a
"mortgage banker", they are not required to disclose the "yield spread
premium" to the borrower=higher monthly mortgage payment. Mortgage
brokers are required to disclose yield spreads to consumers.

A second severe problem with homebuilders is that they frequently tell
appraisers what they want their homes to sell for, rather than allow the
appraiser/appraisal firm to their job. "Either hit our values", the
homebuilder wants (real or not), or they find another
appraiser/appraisal firm that will. If there is a real estate bubble
burst this year, it will start with homebuilders slashing their in some
cases false valuations. Inflating real estate appraisals/massive
appraisal fraud is the ticking time bomb that could potentially crush
the US economy/real estate markets nationwide. Once again Wall Street
was asleep at the switch for a disaster that could be worse than the S&L
crisis of the 1980's.

3. Mortgage Lead generation scams on the Internet.: Once again the
consumer/homeowner can get taken for a ride, or ends up with a much more
expensive mortgage product. Most Internet providers have gladly sold
advertising space to just about any lender, honest or not. Do business
with local or well known mortgage firms.

4. Real Estate firms that also want to be the consumer's mortgage
lender. We feel it is the ultimate conflict of interest for a real
estate agent/firm to also be wearing the hat of mortgage lender. We
believe the functions of real estate sales & real estate financing need
to be separate. Next to national homebuilders blackmailing appraisal
firms into unrealistic valuations, are real estate agents acting as
mortgage lenders doing the same thing. Consumers are advised to steer
clear of real estate agents/brokers also acting as mortgage bankers.

5. If anyone is looking to the Bush Administration, HUD, or the US
Senate or House Banking Committees for help, don't hold your breath. In
light of the Abramoff & Duke Cunningham Congressional bribery scandals
one would hope that a consumer/homeowner friendly environment might
exist. Nothing could be further from the truth.

In reality banks and mortgage bankers are not held to the same standards
as are mortgage brokers with respect to serious consumer disclosure
issues. At the very top of this list are 'yield spread premiums" (a kick
back for increasing the mortgage interest rate).

Many have concluded, unlike mortgage brokers, banks and mortgage bankers
are not being required to disclose these kick-backs because, they are
the number one contributer to US House & Senate Banking Committees.
President Bush had his Gala re-election campaign party in part financed
by a mortgage lender that has been ordered to pay $300 million+ back to
consumers.

The Homeowners Consumer Center (Http://HomeownersConsumerCenter.Com)
and The Mortgage Inspection Service (Http://MortgageInspectionService.Com)
want consumers/homeowners to understand these realities and at the same
time they would like to partner with local, reputable mortgage
firms/lenders that are interested in advancing educational campaigns in
their communities so that consumers will be better educated when making
application for mortgages or refinances. The goal of this campaign is to
increase originations for participating mortgage firms/lenders & at the
same time give the consumer an honest mortgage product/refinance.

The Homeowners Consumer Center also think it important that states and
the federal government eliminate loop holes that prevent transparency in
a mortgage transaction, regardless of a lenders status as broker, banker
or the amount of money they contributed/paid to a politician.

Honest mortgage lenders/brokers who want to treat their customers with
honesty are encouraged to contact the Homeowners Consumer Center
(
Http://HomeownersConsumerCenter.Com ) for more
information about a state by state campaign to get the word out about
honest or hard working mortgage lenders. To join the Homeowners Consumer
Center in this campaign, mortgage firms/ lenders will be required to
agree to a realistic consumer disclosure agreement. A straight forward
approach like this is long over due in todays mortgage world. Homeowners
& consumers deserve better, and The Homeowners Consumer Center and its
partner, The Mortgage Inspection Service think this is a very solid step
to try to cure problems associated with an out of control mortgage
industry.

Video of Bogle's speech on the
Mutual Fund Industry

"If you do not believe we are we are in teh marketing business,
consider rate of fund failure....there have been 30,000 funds in
history, 11,000 of them are gone....Even in the last 5 years,
25%, actually 27% of all equity funds have vanished....I am
afraid to say, it is largely a marketing business."

In a shocking rip-off
of taxpayers, federal hurricane relief bought "Girls Gone
Wild" videos, Caribbean vacations and French champagne, as
thousands of brazen scam artists bilked the government out
of $1.4 billion, a bombshell report reveals.

Although the aid was intended to
shelter and clothe thousands of devastated families from
hurricanes Katrina and Rita, the audit to be presented to
Congress today shows a widespread criminal splurge of
debauchery and excess while the feds were asleep at the
switch.

One evacuee scammed a luxurious
$1,000 vacation at Punta Cana, a resort area in the
Dominican Republic.

Some opted for live entertainment:
An evacuee spent $600 at a "gentlemen's club" in Houston,
and another doled out $400 on "adult erotica products" at a
Houston store called The Pleasure Zone.

"This is an assault on the American
taxpayer," said Rep. Michael McCaul (R-Texas), chairman of
the House Homeland Security Committee's subcommittee on
investigations. The panel will conduct the hearing today.

"Prosecutors from the federal level
down should be looking at prosecuting these crimes and
putting the criminals who committed them in jail for a long
time."

CBS News reported last night that
7,000 people could be charged.

As much as 16 percent of the total
aid was hijacked by con artists, the report concludes.

A copy of today's testimony about
the audit was obtained last night by The Post.

One "victim" rode out the storm's
aftermath by spending $300 at a San Antonio Hooters - and
$200 for a bottle of Dom Perignon.

The feds also covered one person's
three-month stay for a Honolulu hotel for $115 per night.
The alleged scammer also collected $2,358 in rental
assistance - despite residing in North Carolina, not New
Orleans.

Anticipating the city's rebirth,
another evacuee spent $2,000 on five New Orleans Saints
season tickets.

But one evacuee was more practical,
spending $1,000 to pay a divorce lawyer.

Closer to home, one rip-off artist
double-dipped in Queens - collecting $31,000 to cover an
extended $149 per night at the Ramada Plaza Hotel while also
taking $2,358 in rental assistance.

Most of the hucksters used phony
names and addresses to collect Katrina housing aid. Many
listed post-office boxes, and some even used New Orleans
cemeteries - but the hapless feds failed to check up on
them.

Most fraud occurred because the
Federal Emergency Management Agency "did not validate the
identity of the registrant," according to investigators.

Incredibly, the feds handed out
millions in emergency housing aid to 1,000 people who used
the names and Social Security numbers of prison inmates in a
half-dozen states across the south.

FEMA paid more than $20,000 to one
prisoner who used a post-office box as the address of his
"damaged property." It sent 13 payments to one person who
filed claims at the same address using 13 Social Security
numbers.

A federal investigator sniffing out
mismanagement listed a vacant lot as a damaged address - and
still got a $2,358 check.

"This is absolutely disgraceful,"
said Rep. Peter King (R-L.I.). FEMA "loses a billion in
Katrina at the same time it's cutting 40 percent of
[anti-terror] funding to New York City," he added.

In the spring of 2003, the chairman
of the New York Stock Exchange, Richard A. Grasso, had his
eyes on a very rich prize. Although Mr. Grasso's annual
compensation at the time was about $12 million, on a par
with the salaries of Wall Street titans whose companies the
exchange helped regulate, he had accumulated $140 million in
pension savings that he wanted to cash in — while still
staying on the job.

Now Henry M. Paulson Jr., the
chairman of Goldman Sachs and a member of the exchange's
compensation committee, was grilling Mr. Grasso about the
propriety of drawing down such an enormous amount and
suggested that he seek legal advice. So Mr. Grasso said he
would call Martin Lipton, a veteran Manhattan lawyer and the
Big Board's chief counsel on governance matters. Would it be
legal, Mr. Grasso subsequently asked Mr. Lipton, to just
withdraw the $140 million if the exchange's board approved
it? Mr. Grasso told Mr. Lipton that he worried that a less
accommodating board might not support such a move, according
to an account of the conversation that Mr. Lipton recently
provided to New York State prosecutors. (Mr. Grasso has
denied voicing that concern.) Mr. Lipton said he told Mr.
Grasso not to worry; as long as directors used their best
judgment, Mr. Grasso's request was appropriate.

Mr. Grasso continued to fret. What
about possible public distaste for the move? Yes, there
would be some resistance from corporate governance
activists, Mr. Lipton recalled telling him, but given his
unique standing in the business community he was "fully
deserving of the compensation."

Then Mr. Lipton, a founding partner
of Wachtell Lipton Rosen & Katz and a longtime adviser to
chief executives on the hot seat, dangled another, hardball
option in front of Mr. Grasso. If a new board resisted a
payout, Mr. Lipton advised, Mr. Grasso could just sue the
board to get his $140 million. The conversation represented
a pivotal moment at the exchange, occurring when corporate
governance and executive compensation were already areas of
public concern. Mr. Grasso eventually secured his pension
funds. But the particulars surrounding the payout later
spurred Mr. Paulson to organize a highly publicized palace
revolt against Mr. Grasso, leading to the Big Board's most
glaring crisis since Richard Whitney, a previous president,
went to jail on embezzlement charges in 1938.

An examination of thousands of
pages of depositions from participants in the Big Board
drama, as well as other recent court filings, highlights the
financial spoils available to those in Wall Street's top
tier. It also shines a light on deeply flawed governance
practices and clashing egos at one of America's most august
financial institutions, all of which came into sharp relief
as Mr. Grasso jockeyed to secure his $140 million.

ELIOT SPITZER, the New York State
attorney general, sued Mr. Grasso in 2004, contending that
his Big Board compensation was "unreasonable" and a
violation of New York's not-for-profit laws. With a trial
looming this fall, prosecutors have closely questioned both
Mr. Lipton and Mr. Grasso about their phone call.
Prosecutors are likely to highlight Mr. Grasso's own doubts
about the propriety of cashing in his pension; on two
separate occasions Mr. Grasso withdrew his pension proposal
from board consideration before finally going ahead with it.

The depositions paint a portrait of
Mr. Grasso as a man who paid meticulous attention to every
financial perk, from items like flowers and 99-cent bags of
pretzels that he billed to the exchange, to his stubborn
determination to corral his $140 million nest egg. While the
board ultimately approved his deal, court documents also
show a roster of all-star directors, including chief
executives of all the major Wall Street firms, often at odds
with one another or acting dysfunctionally.

A recent filing by Mr. Spitzer
contended that Mr. Grasso's chief advocate, Kenneth G.
Langone, a longtime friend and chairman of the Big Board's
compensation committee, was less than forthcoming in keeping
the exchange's 26-member board in the loop about how Mr.
Grasso's rising pay was also inflating his retirement
savings.

"Much news and sports
commentary focuses on the ever-larger paychecks of
professional athletes. But even Peyton Manning is a
day laborer compared to the modern Fortune 500
CEO....Over his last five years at the helm, he got
$162 million, even as Pfizer earnings faltered.
Carol Hymowitz of the Wall Street Journal reported
that the head of Pfizer's "compensation committee"
defended McKinnell's windfall on grounds of market
forces in executive pay -- which in this context
appears to mean, "CEOs at other companies are
picking shareholders' pockets, too."....McKinnell's
pay for his tenure atop Pfizer equates to $130,000
per work day."

and slightly later:

"...consider that executive
income usually is rubber-stamped by boards of
directors whose members may be engaged in
self-dealings with the firm, or who have a
self-interest in rising CEO pay. As Julie Creswell
noted in the New York Times, "Five of the six active
Home Depot board members are current or former chief
executives of public corporations … CEOs benefit
from one another's pay increases, because
compensation packages are often based on surveys
detailing what their peers are making....The board
members know the more they inflate CEO pay, the more
they themselves will be able to pilfer from their
own shareholders"

Ignoring the use of the word
'pilfer', this is a well-presented valid point. However,
Easterbrook's next point deserves a yellow penalty flag
and further review:

"Recently the Business Roundtable released a
study purporting to
show that CEO pay rose 9.6 percent annually from
1995-2005, while stockholder returns rose 9.9
percent in the same period. So things aren't so bad,
eh? The Business Roundtable said the study 'sets the
record straight.' The Business Roundtable is, by its
own description, 'an association of chief executive
officers of leading U.S. companies.' As Gretchen
Morgenson, dean of Wall Street journalists, laid it
out in the New York Times, the study systematically
understated the income of CEOs... 'The study counts
only the value of the options and restricted stock
received by executives on the dates the awards were
made.'"

Uh, wait, isn't that what we
should be doing?

True, we should take into account the non normality of
the stock distribution (induced both by rewriting
underwater options and by the now famous back dating of
options) which causes the Black-Scholes formula to
understate the true value of the grant, BUT the
value at grant is what we should consider. We can
debate whether the Black-Scholes formula is correct or
not, but theoretically the value at grant (again
presuming a fair grant) is what matters.

Moreover, while it is true that the Business Roundtable
is made up of CEOs, that should not be grounds for
dismissal. The actual study does have several valid, and
overlooked points. Notably that medians should be used,
that the media "sometimes summarizes the pay practices
for all CEOs from only the very largest companies", and
the seemingly inarguable point that "pay statistics
should be referenced accurately and applied
responsibly".

Like other things, I will take the bad with the good.
Overall
Tuesday Morning QB is still my favorite sports article.
Its author is Gregg Easterbrook who is a former Buffalo
School teacher and who wrote the
Progress Paradox, does a great
job weaving many topics together in a funny, witty
manner. That said, I guess I can no longer count TMQ as
"finance reading". LOL.

Outrageous Executive Audacity

"That Other Guy From Omaha," by Gretchen Morgenson, The
New York Times, August 29, 2006

Mr. Gupta is, shall we say, a piece
of work. He often prevents large shareholders from asking
questions on conference calls. He has received compensation
that was not earned under the terms of the company’s
executive compensation program, according to a lawsuit that
Cardinal Value Equity Partners, infoUSA’s largest outside
holder, filed against the company. And, the suit alleges,
his board has given him free rein to dispense stock options
to whomever he likes.

Related-party transactions are also
routine at infoUSA. The Cardinal lawsuit contends that
infoUSA paid a company owned by Mr. Gupta about $608,000 in
2003 to buy his interest in a skybox at the University of
Nebraska’s Memorial Stadium. The university is Mr. Gupta’s
alma mater and home of the Cornhuskers football team. In
June 2005, the suit says, infoUSA paid $2.2 million for a
long-term lease of his yacht. The yacht, named American
Princess, is 80 feet long and has an all-female crew,
according to a report in The Triton, a monthly publication
for boat captains and crews.

Leases on an H2 Hummer, a gold
Honda Odyssey, a Glacier Bay Catamaran, a Mini Cooper, a
Lexus 330, a Mercedes SL500 ­ all used by the Gupta clan ­
as well as rent on a Gupta family condominium on Maui have
also been financed by infoUSA shareholders, the suit said.

Shareholders also paid a company
owned by Mr. Gupta’s wife $64,200 for consulting services in
2003 and 2004. Shareholders have also covered the Gupta
family’s personal use of a corporate jet ­ leased by infoUSA
from a company owned by the family ­ to have fun in the sun
in Hawaii and the Bahamas. Mr. Gupta apparently wasn’t in a
mood to return the favor: during a four-year period ending
in 2004, infoUSA paid $13.5 million to Mr. Gupta’s private
company for use of the aircraft.

What to make of all of this? The
Cardinal lawsuit contends that the carnivalesque spending
amounts to unregulated perquisites and evidence of a
somnambulant board. Sleepy, perhaps, but always on the move.
Some 15 directors have spun through infoUSA’s boardroom door
over the last decade; five of them stayed less than a year.

It wasn’t until two years ago ­
November 2004 ­ that infoUSA’s board created guidelines for
the approval of related-party transactions over $60,000. The
Cardinal lawsuit alleges that some of infoUSA’s
related-party dealings with certain board members “did not
have a sufficient record to show authorizations and whether
the services could be procured from other sources at
comparable prices.”

None of the infoUSA board members
returned phone calls seeking comment. Mr. Gupta did not
return several phone calls, either.

But Mr. Gupta’s biggest faux pas
occurred in June 2005, when infoUSA warned that its earnings
would not be up to expectations. The stock fell from $11.94
a share to $9.85 the day after the announcement. Less than a
week later, Mr. Gupta offered to acquire infoUSA for $11.75
a share, far less than the $18 a share he had said the
company was worth just a few months earlier.

A special committee of the
company’s board was set up to evaluate Mr. Gupta’s offer and
to field bids from other possible partners in order to
secure the highest possible price for infoUSA shareholders.
Almost exactly a year ago, the committee concluded that the
$11.75 offer was too low and that it should be subject to a
“market check.”

At a board meeting on Aug. 26,
2005, Mr. Gupta said that he would not sell any of his
shares to a third party in an alternative transaction,
according to the lawsuit. Some directors might have used
this opportunity to give Mr. Gupta a well-earned public
rebuke. But a majority of the sleepwalkers at infoUSA just
got into lockstep with their chief executive.

The directors responded by deciding
that there was no need for infoUSA’s special committee to
exist. They voted 5 to 3 (with one abstention) to abolish
it. The only directors voting for the committee’s
continuance were three of its four members; the fourth
abstained from voting. The stock closed that day at $10.89.

The vote was the last straw for
Cardinal Value Equity Partners. It filed suit in February
against Mr. Gupta, some of infoUSA’s directors and the
company itself.

“Our suit says that the special
committee was prematurely terminated, that they didn’t get
to finish their work and that was the wrong decision by the
entire board,” said Robert B. Kirkpatrick, a managing
director at Cardinal Capital Management. “We’re not asking
for $100 billion; we ask that the special committee be
reconstituted to be able to have the time to fulfill their
original mandate as dictated by the board.”

In other words, to reopen the
possibility of a buyout.

IN the meantime, all is right in
Mr. Gupta’s gilded world. About three weeks ago, on Aug. 4,
infoUSA announced that it was buying Opinion Research, a
consulting services company, for $12 a share, an almost 100
percent premium to Opinion Research’s market price the day
before the announcement.

Lo and behold, who owned Opinion
Research shares the day the deal was announced? The Vinod
Gupta Revocable Trust, according to a regulatory filing,
owned 33,000 shares. The trust, controlled by Mr. Gupta,
sold 22,000 of its shares after the merger announcement sent
Opinion Research’s stock rocketing.

The trust’s shares don’t represent
a huge stake, but it is worth asking: Did infoUSA’s
directors know that the Gupta trust was an Opinion Research
shareholder when they signed off on the premium-priced deal?
And what gains did the trust record when it sold into the
deal-jazzed market? For now, the answers are unclear.

In coming weeks, a judge in
Delaware will rule on whether the Cardinal lawsuit can
proceed. InfoUSA has asked the judge to dismiss the case,
saying that it has no merit.

“Unfortunately, the system is
broken in this case,” said Donald T. Netter, senior managing
director at Dolphin Financial Partners, a private investment
partnership in Stamford, Conn., that is an infoUSA
shareholder. “The board has failed to protect the
unaffiliated shareholders. When the system works properly,
you shouldn’t get into these situations.”

Fake Invoice FraudThe owner of the nation's largest computerized machine
tool maker was arrested yesterday morning at his California home and charged
with orchestrating a tax fraud that cost the government nearly $20 million as
well as intimidating witnesses and a federal agent investigating the case.Gene
F. Haas, 54, of Camarillo, Calif., the owner of Haas Automation and other
companies, was accused in a 52-page indictment of running a bogus invoicing
scheme to create fake tax deductions. Mr. Haas was held without bail after his
arraignment in Federal District Court in Los Angeles.
David Cay Johnston, "Executive Accused of Tax Fraud and Witness Intimidation,"
The New York Times, June 20, 2006 ---
http://www.nytimes.com/2006/06/20/business/20tax.html?_r=1&oref=slogin

A day after Homeland Security
officials denied knowing about former Rep. Randy “Duke”
Cunningham's attempts to gain a contract for a limousine
service, Cunningham's letter praising the company surfaced
in the department's files.

In the letter, Cunningham wrote of
his “full support of (Shirlington Limousine's) wish to
provide transportation services for the Department of
Homeland Security,” or DHS.

FBI agents have been investigating
whether the company – while working for Brent Wilkes, an
unindicted co-conspirator in the Cunningham corruption case
– helped Wilkes arrange for prostitutes for Cunningham while
Wilkes was vying for federal contracts.

Wilkes and Shirlington founder
Christopher Baker have denied any involvement with
prostitutes. But Baker has said through his lawyer that he
provided transportation for “entertainment” at Wilkes'
hospitality suites in Washington from 1990 to the early part
of the decade.

At a hearing of the House Homeland
Security Committee on Thursday, it was revealed that Baker
has been testifying before a grand jury. The committee is
probing whether Cunningham pressured Homeland Security to
give Shirlington a contract.

Although Baker is a convicted
felon, Cunningham gave him a character reference Jan. 16,
2004.

“I have personally known Mr. Baker
since the mid-1990s,” Cunningham wrote to Homeland Security.
“He is dedicated to his work and has been of service to me
and other Members of Congress over the years.”

At the time, the department had no
plans to hire a limousine service. But within three months,
the department gave Baker a $3.8 million contract. A year
later, he got a contract worth up to $21.2 million.

Until recently, Homeland Security
officials have denied that any legislators were involved in
the contract. In May, department officials twice told
Congress that they had no record of Cunningham's letter.

On Thursday, however, Baker gave
Congress a sworn affidavit that he had sent the letter to
the department. Homeland Security officials said they found
an e-mail mentioning the letter but had no other evidence of
its existence.

Yesterday the department produced
the letter, saying it had been misfiled.

As Republicans lurch
toward November, they're trying to reclaim their birthright
as fiscal conservatives. So far they're moved up to a D from
an F, with a chance to still grab a gentleman's C.

In the small favors
department, the House this month passed an "earmark" reform
to bring more transparency to the runaway process of
sticking pork into appropriations bills. Give House Majority
Leader John Boehner credit for staring down his party's
Appropriations Committee barons on this one; that's more
than Tom DeLay or Roy Blunt ever did when they ran the
majority.

Lawmakers will now
have to sign their names to earmark requests, although the
loopholes in this requirement are still large. The rule
applies only to non-federal earmark recipients, which means
that pet projects aimed at, say, the Department of Defense
will still be secret. The definition of a "tax earmark" was
also deliberately kept narrow, shielding many of those
expensive giveaways.

It's also no accident
that the new transparency rule won't apply to the 10
spending bills the House has already passed this year.
Meanwhile, the Senate has yet to act, and the new House rule
expires at the end of this Congress. GOP appropriators
figure that they can block its renewal in January, when the
election heat is off, assuming their bad spending habits
haven't cost Republicans their majority.

In a better sign of
progress, President Bush will today sign the "Federal
Transparency Act," which will create a searchable public
database of some $1 trillion worth of federal grants,
contracts and loans. The brainchild of Senators Tom Coburn
(R., Oklahoma) and Barack Obama (D., Illinois), the database
will help the public identify the lawmakers who sponsor
these provisions. The idea is to expose these favors to
public scrutiny and force their authors to defend them.

The next test of GOP
spending sincerity is whether the Senate will force an
up-or-down vote on the "legislative" line-item veto. This
would let a President strike out individual spending items
from larger legislation, sending them back to Congress for
an override vote within 14 legislative days. A simple
majority vote would be enough to override, so this item veto
isn't as powerful as the one that Republicans gave to Bill
Clinton in the 1990s and was declared unconstitutional by
the Supreme Court. But it would still give the President
more leverage to kill the most egregious earmarks.

The House passed the
item veto in June, but the Senate has failed to act. By our
count, some 65 current Senators have voted for a version of
the line-item veto at some point in the past. Eleven
Democrats voted to give it to Mr. Clinton, and four more
Democrats voted for a version of it while in the House.

Majority Leader Bill
Frist should give Senators the opportunity to pass a bill
designed to end the secret earmarking that has helped
produce some of the corruption scandals in this Congress.
Win or lose on the floor, Republicans would at least show
they're trying to swear off their own worst spending
excesses.

Interior Department suppressed auditing effortsFour government auditors who monitor
leases for oil and gas on federal property say the Interior
Department suppressed their efforts to recover millions of
dollars from companies they said were cheating the government.
The accusations, many of them in four lawsuits that were
unsealed last week by federal judges in Oklahoma, represent a
rare rebellion by government investigators against their own
agency. The auditors contend that they were blocked by their
bosses from pursuing more than $30 million in fraudulent
underpayments of royalties for oil produced in publicly owned
waters in the Gulf of Mexico.
Edmund L. Andrews, "Suits Say U.S. Impeded Audits for Oil
Leases," The New York Times, September 21, 2006 ---
Click Here

Question
Why does the FDA flap come as no surprise? For decades most regulatory agencies
have been overtaken by the industries that are supposed to be regulated.

The federal system for approving and
regulating drugs is in serious disrepair, and a host of dramatic
changes are needed to fix the problem, a blue-ribbon panel of
government advisers concluded yesterday in a long-awaited
report. The analysis by the Institute of Medicine shined an
unsparing spotlight on the erosion of public confidence in the
Food and Drug Administration, an agency that holds sway over a
quarter of the U.S. economy. The report, requested by the FDA
itself, found that Congress, agency officials and the
pharmaceutical industry share responsibility for the problems --
and bear the burden for implementing solutions . . . "FDA's
credibility is its most crucial asset, and recent concerns about
the independence of advisory committee members . . . have cast a
shadow on the trustworthiness of the scientific advice received
by the agency," the report said. To reduce turnover and
political interference, the institute said, the FDA commissioner
should be appointed to a fixed six-year term. Currently, the
commissioner serves at the pleasure of the president.
"FDA Told U.S. Drug System Is Broken Expert Panel Calls For
Major Changes," by Shankar Vedantam, Washington Post,
September 23, 2006; Page A01 ---
Click Here

Question
Why does the DEA flap come as no surprise? For decades most
regulatory agencies have been overtaken by the industries that
are supposed to be regulated. Department of Education officials
violated conflict of interest rules when awarding grants to
states under President Bush’s billion-dollar reading initiative,
and steered contracts to favored textbook publishers, the
department’s inspector general said yesterday. In a searing
report that concludes the first in a series of investigations
into complaints of political favoritism in the reading
initiative, known as Reading First, the report said officials
improperly selected the members of review panels that awarded
large grants to states, often failing to detect conflicts of
interest. The money was used to buy reading textbooks and
curriculum for public schools nationwide.
Sam Dillon, "Report Says Education Officials Violated Rules,"
The New York Times, September 23, 2006 ---
Click Here

An article published in the March 2006
issue of the CPA Journal says "Accounting did not cause the recent
corporate scandals such as Enron and WorldCom. Unreliable financial
statements were the results of management decisions, fraudulent or
otherwise. To blame management's misdeeds on fraudulent financial
statements casts accountants as the scapegoats and misses the real
issue....". The article can be accessed at
http://www.nysscpa.org/cpajournal/2006/306/essentials/p48.htm

Any thoughts from anybody??

Ganesh M. Pandit
Adelphi University

June 6, 2006 reply from Bob Jensen

Shame on the Lin and Wu!

Enron's Chief Accounting
Officer, Rick Causey, now sits in prison after having admitted to
falsifying accounts. He refused to testify in the Lay/Skilling trial
unless granted immunity from other prosecution.

Other Enron executives,
including some accountants, have confessed to accounting fraud.

Accounting fraud committed
by accountants purportedly because their bosses ordered them to
knowingly participate in the fraud does not make the fraud
non-accounting fraud no matter what the NYSSCPA Society tries to tell
us.

The NYSSCPA Society
published this Lin and Wu article. Recall that the NYSSCPA Society only
took CPA licenses away from CPAs convicted of drunk driving and
overlooked CPA fraud for decades in New York. I don't place much stock
in this NYSSCPA Society defense of accountants. I don't find the article
that you mention even worth citing. The authors did not do their
homework on the Enron or Worldcom scandals.

When Andersen auditor Carl
Bass sniffed out both charge-off and derivatives accounting fraud, his
boss David Duncan had him removed from the Enron audit.

The Worldcom fraud was
Accounting 101 where over $1 billion in expenses were knowingly
capitalized by the CFO and top accounting executives. The top accountant
mainly involved confessed that he knew what he did was against the law
but played along because of his need for the large paycheck. Only when
Worldcom internal auditor Cynthia Cooper finally figured out what was
going on and refused to play along was this enormous accounting fraud
brought to light.

These were huge ACCOUNTANT
frauds contrary to what the Lin and Wu would like to make you believe
with a whitewash article that should be beneath the professional
standards of a CPA society. CPAs are under tremendous pressure to lobby
on behalf of clients to water down Section 404 of SOX. The NYSSCPA is
simply playing along with defending accountants who knowingly committed
felonies. Now if they also had DWI convictions they'd be in bigger
trouble with the NYSSCPA Society.

I don't think that this article is
trying establish that this is not an accounting
fraud...regardless of the title of the article. It is only
saying that there were several parties in addition to the
accountants who helped this fraud! :)

It must be obvious from all the
media reports that there were "parties in addition to the
accountants". Lay was not an accountant; Skilling was not an
accountant; Fastow never qualified as a CPA. So, if the Lin
& Wu paper is merely stating the obvious, why publish it?

The only obvious answer is that the
paper was approved for publication, not as a professional,
but a political, statement. As Bob says,

"CPAs are under > tremendous
pressure to lobby on behalf of clients to water down Section
> 404 of SOX. The NYSSCPA is simply playing along with these
clients and > their CPAs."

Think for a moment about how
articles are read and interpreted. Most academic articles
are published in so-called "academic" journals - to be read
by other academics and thereafter consigned to the dust of
history. A few establish new theories or lines of enquiry;
rather more either mine an already existing line of enquiry
or justify themselves in other ways such as maintaining or
establishing academic reputations. Dr Johnson famously wrote
"No man but a fool ever wrote, except for money" - and the
money doesn't have to be a direct flow of cash. There are a
few selfless souls who find academic accounting an end in
itself, but they are thin on the ground.

Most professional articles are read
far more widely. But they are often skimmed or "headlined",
with summaries - or less - tossed around for any manner of
reasons. Whether it was their intention or not, what L and W
have done is to provide ammunition in the defence of a group
- accountants - who, as the NYSSCPA and other professional
groups, seek to deflect responsibility and accountability
when they should be engaging in a much more profound
examination of accounting policies, procedures and ethics.
Articles such as that by L &W are harvested for sound bites
by the profession's apologists and replayed ad infinitum for
the benefit of any politician / lobbyist who will lend an
ear.And, as Bob says, that comes down to yet more pressure
to roll back the one major advance in accountability the
accounting world has experienced in a very long time. All in
all, its NOT "A Good Thing".

A quote.... "Then came
Sarbanes-Oxley, which required that option grants be
reported within two business days. A new paper by Lie and
Randall Heron of Indiana University, still unpublished,
finds that evidence of backdating virtually disappears after
Aug. 29, 2002, when the requirement took effect."

I think Fastow's sentence should have been 60 years, one year for each
million he stoleHe was the worst of the worst corporate criminals and the least liked
executive even within his own company.
But he's been clever enough to con the legal system into reducing his sentence
to six years. Andy's still laughing at the system!

Why white collar crime pays for
Chief Financial Officer:
Andy Fastow's fine for filing false Enron financial
statements: $30,000,000
Andy Fastow's stock sales benefiting from the false
reports: $33,675,004
Andy Fastow's estimated looting of Enron
cash: $60,000,000
That averages out to winnings of $6,367,500 per year
for each of the ten years he's expected to be in
prison.
You can read what others got at
http://www.trinity.edu/rjensen/FraudEnron.htm#StockSales
Nice work if you can get it: Club Fed's not so bad
if you earn $17,445 per day plus all the accrued
interest over the past 15 years.

Prosecutors informed Fastow that they would
shelve plans to charge Lea (Fastow's wife) if
he would plead guilty. Fastow refused and Lea
was indicted. Suddenly, the Fastows faced the
prospect that their two young sons would have to
be raised by others while they served lengthy
prison terms. The time had come for Fastow to
admit the truth.

"All
rise."

At 2:05 on
the afternoon of January 14, 2004, U.S. District
Judge Kenneth Hoyt walked past a marble slab on
the wall as he made his way to the bench of
courtroom 2025 in Houston's Federal District
Courthouse. Scores of spectators attended,
seated in rows of benches. In front of the bar,
Leslie Caldwell, the head of the Enron Task
Force, sat quietly watching the proceedings as
members of her team readied themselves at the
prosecutors' table.

Judge Hoyt
looked out into the room. To his right sat an
array of defense lawyers surrounding their
client, Andy Fastow, who was there to change his
pleas. Fastow, whose hair had grown markedly
grayer in the past year and a half, sat in
silence as he waited for the proceedings to
begin.

Minutes
later, under the high, regal ceiling of the
courtroom, Fastow stepped before the bench,
standing alongside his lawyers.

"I
understand that you will be entering a plea of
guilty this afternoon," Judge Hoyt asked.

"Yes, your
honor," Fastow replied.

He began
answering questions from the judge, giving his
age as forty-two and saying that he had a
graduate degree in business. When he said the
last word, he whistled slightly on the s,
as he often did when his nerves were frayed. He
was taking medication for anxiety, Fastow said;
it left him better equipped to deal with the
proceedings.

Matt
Friedrich, the prosecutor handling the hearing,
spelled out the deal. There were two conspiracy
counts, involving wire fraud and securities
fraud. Under the deal, he said, Fastow had
agreed to cooperate, serve ten years in prison,
and surrender $23.8 million worth of assets.
Lea would be allowed to enter a plea and would
eventually be sentenced to a year in prison on a
misdemeanor tax charge.

Fastow
stayed silent as another prosecutor, John Hemann,
described the crimes he was confessing. In a
statement to prosecutors, Fastow acknowledged
his roles in the Southampton and Raptor frauds
and provided details of the secret Global
Galactic agreement that illegally protected his
LJM funds against losses in their biggest
dealings with Enron.

Hemann
finished the summary, and Hoyt looked at Fastow.
"Are those facts true?"

"Yes, your
honor," Fastow said, his voice even.

"Did you
in fact engage in the conspiratorious conduct as
alleged?"

"Yes, your
honor."

Fastow was
asked for his plea. Twice he said guilty.

"Based on
your pleas," Hoyt said, "the court finds you
guilty."

The
hearing soon ended. Fastow returned to his seat
at the defense table. He reached for a paper
cup of water and took a sip. Sitting in
silence, he stared off at nothing, suddenly
looking very frail.

Why white collar crime pays for Chief Enron
Accountant:
Rick Causey's fine for filing false Enron financial
statements: $1,250,000
Rick Causey's stock sales benefiting from the false
reports: $13,386,896
That averages out to winnings of $2,427,379 per year
for each of the five years he's expected to be in
prison
You can read what others got at
http://www.trinity.edu/rjensen/FraudEnron.htm#StockSales
Nice work if you can get it: Club Fed's not so bad
if you earn $6,650 per day plus all the accrued
interest over the past 15 years.

A former top accountant
at Enron Corp. sealed his plea deal with
prosecutors Wednesday, becoming a key potential
witness in the upcoming fraud trial of former
CEOs Kenneth Lay and Jeffrey Skilling.

Lay and Skilling were
granted two extra weeks to adjust to the setback
before their much anticipated trial, the last
and biggest of a string of corporate scandal
cases, starts at the end of January.

The accountant, Richard
Causey, pleaded guilty to securities fraud
Wednesday in return for a seven-year prison term
— which could be shortened to five years if
prosecutors are satisfied with his cooperation
in the trial. He also must forfeit $1.25 million
to the government, according to the plea deal.

Causey's arrangement
included a five-page statement of fact in which
he admitted that he and other senior Enron
managers made various false public filings and
statements.

"Did you intend in
these false public filings and false public
statements, intend to deceive the investing
public?" U.S. District Judge Sim Lake asked.

"Yes, your honor,"
replied Causey, who said little during the short
hearing, appearing calm, whispering to his
attorneys and answering questions politely.

Continued in article

Jensen Comment
I forgot to mention the millions that Fastow and
Causey will probably make on the lecture circuit
after they are released from prison. Scott alludes
to this below:

"Morze created 10,000+
phony documents, and no one caught it. He
teaches his course Fraud: Taught by the
Perpetrator many times each year for the Federal
Reserve, bar associations, Institute of Internal
Auditors, CPA and law firms.

Public speaking does
seem to benefit the speakers. Guys in Gary's
group are dealing better than other white-collar
criminals, says Mark Morze, one of Mr. Zeune's
speakers, who served more than four years in
jail for his role in ZZZZ Best Co., the
carpet-cleaning enterprise that bilked banks and
investors for some $100 million back in the
1980s. Guys who are in denial pay the price
forever, Mr. Morze says. Source: The Wall Street
Journal, May 25, 1999"

What set Andy Fastow and Michael Kopper apart
from most of the other Enron executives prior to the illegal
self declarations of bonuses from a secret bank account set up
just before Enron declared bankruptcy?

Fastow and Kopper were the most dastardly criminals who
repeatedly conspired to steal millions from Enron itself and got
away with it due to amazing luck and/or cowardice of other
executives, bankers, and auditors who suspected bad things were
being engineered by Fastow but were afraid to ask.In
particular, Fastow openly promised Ken Lay, Jeff Skilling, and
Enron's entire Board that he would not take fees for managing
the SPEs they allowed him to set up for purposes of hedging and
keeping debt off the books. Subsequently, Fastow with the aid
of Kopper managed to secretly skim off something over $60
million dollars into their hidden bank accounts. And much of
what they achieved while running the funds was obtained from
insider information. Having Fastow run these funds was a
blatant conflict of interest that never should've been allowed
by Enron's CEO, Enron's Board, or Enron's auditor (Andersen).

Long-time subscribers to the AECM may remember my quips
(years ago) about Michael Kopper ---
These inspired AECMers to write their own quips about Enron and
about accounting in general.
You can read some of these AECM originals at
http://www.trinity.edu/rjensen/FraudEnron.htm#Humor

Tales from the Enron trial got you
down? Like Andrew Fastow's testimony of how he laundered $10,000
as a tax-free gift to his own sons? So after work you stumble
home, seeking refuge from the workaday sludge in the stark
competitive world of Sports Illustrated, which this week is
awash in the details of the doping case against Barry Bonds, an
Icarus, legend has it, who flew toward baseball heaven on wax
wings made from human growth hormone. For perspective on theBonds myth, I called Gary Wadler, a
physician who has seen it all as a member of the World
Anti-Doping Agency. "Bonds and Fastow were both into cooking,"
Dr. Wadler offered. "Bonds cooked the record books and Fastow
cooked the financial books."
Daniel Henninger, "Barry Bonds, Meet Andrew Fastow, The Wall
Street Journal, March 17, 2006 ---
http://www.opinionjournal.com/columnists/dhenninger/?id=110008100

Former Enron CFO Andy Fastow, the
prosecution's star witness, testified at the Lay-Skilling
trial that he ran financial partnerships designed to help
Enron meet earnings targets and mask huge losses. Mr. Fastow,
who hasn't spoken publicly since October 2001, is among the
most highly anticipated witnesses in this trial. Following
are excerpts from his testimony.

Wednesday, March 8 LAY KNEW: Fastow
testified that former chairman Ken Lay was at a meeting in
August 2001 in which he heard about a "hole in earnings" at
Enron, just days before he gave a BusinessWeek interview
claiming Enron was in its "best shape" ever. Fastow said of
the Lay interview, "I think most of the statements in there
are false."

* * * ON GREED: In a heated
cross-examination by Skilling lawyer Daniel Petrocelli,
Fastow admitted, "I believe I was extremely greedy, and that
I lost my moral compass, and I've done terrible things that
I very much regret."

INSIDE-OUT: Steady growth and
bright prospects "was the outside view of Enron," Fastow
testified. "The inside view of Enron was very different."

* * * RECURRING DREAM: Lay opted to
characterize a loss on an investment in the third quarter of
2001 as "nonrecurring," even though a gain on the same
holding was earlier characterized as "recurring," Fastow
testified, adding, "I thought that was an incorrect
accounting treatment."

* * * DEATH SPIRAL: By October
2001, Enron's suppliers refused to trade with the company
and Fastow testified that he feared the company would
collapse and that he and an aide went to Lay to warn him. "I
said I thought this was a death spiral, a serious risk of
bankruptcy. I said the majority of trades being done were to
unwind positions."

* * * MORE HEROICS: "Within the
culture of corruption Enron had, a culture that rewarded
financial reporting rather than rewarding economic value, I
believed I was being a hero. I was not. It was not a good
thing. That's why I'm here today."

Tuesday, March 7 THE PROFIT
PROBLEM: One of Enron's off-balance-sheet partnerships,
LJM1, was designed to help the company "solve a problem,"
Fastow testified. "We were doing this to inflate our
earnings, and I don't think we wanted to show people what we
were doing.''

* * * MORE DEALS: Fastow quoted
Skilling as saying, " 'Get me as much of that juice as you
can,' '' after Fastow informed him that more money would
need to be raised to continue making deals like LJM1. In
such deals, these so-called outside entities would purchase
underperforming assets from Enron to get debt off its
balance sheet and boost earnings.

* * * RISKY BUSINESS: Fastow
testified that partnerships like the LJMs were willing to do
deals that Enron "just couldn't do with others" because they
were too risky or didn't make economic sense.

* * * SKILLING'S WORD: Fastow
testified about pressure from Skilling to have one of the
LJMs buy a minority stake in a Brazilian power plant owned
by Enron because Enron's South American unit was struggling
to meet its earnings target. "I told him it was a piece of
s--t, and no one would buy it,'' Fastow said, adding that he
relented, in part, because Skilling assured him he wouldn't
lose money on the deal. Fastow testified that there were
many more "bear-hug" guarantees like this from Skilling in
mid-2000.

* * * BREAKING THE LAW: Fastow
testified that the LJMs were legal and did many legal deals,
but "certain things I did as general partner of LJM were
illegal."

* * * BELIEVE IT OR NOT: In his
first day of testimony, Fastow repeatedly said that he
thought he was "a hero for Enron," for coming up with these
unique business deals to help the company meet Wall Street
targets even when it was financially in trouble. "I thought
the foundation was crumbling and we were doing everything we
could to prop it up as long as we could … We were in pretty
bad shape."

* * * WORRIES ABOUT PUBLICITY:
Skilling was concerned, Fastow testified, that
off-balance-sheet deals like the LJMs would "attract
attention, and if dissected, people would see what the
purpose of the partnership was, which was to mask
potentially hundreds of millions of dollars of losses."

* * * FALSE TAX RETURN: Fastow
tearfully admitted that he "misled" his wife about some of
the money the couple earned from Enron-related deals. "She
would not, in my opinion, have signed a fraudulent tax
return," Fastow said. Lea Fastow served one year in federal
prison for filing a false tax return.

* * * A FAMILY AFFAIR: Fastow also
admitted that he had one of his top aides send $10,000
checks to each of his sons. The checks were portrayed as
gifts to the boys, but really they were proceeds from a
business deal. "I shouldn't have. It was the wrong thing to
do."

Jensen CommentIt comes as some relief to accountants that Fastow has not
yet mentioned collusion with the Andersen Auditors led by David
Duncan. CFO Fastow worked in secrecy ripping off Enron itself.
CAO Rick Causey worked more closely with Duncan to issue false
financial statements. Rick Causey's fine for filing false Enron
financial statements was $1,250,000.

SUMMARY: In a Houston federal court, Andrew Fastow received a
sentence of 6 years in prison followed by two years of community
service, "significantly less than the 10 years of imprisonment
that had been envisioned in the 2004 plea agreement between Mr.
Fastow and federal prosecutors....'I was very surprised,' said
Leslie Caldwell, the original director of the special Justice
Department task force that investigated the Enron scandal."

QUESTIONS:
1.) Of what criminal actions did Andrew Fastow plead guilty?
What impact did these actions have on shareholders and employees
(including both current employment and retirement plans)?

2.) Access the 175 page declaration by Andrew Fastow linked
through the on-line version of this article. What two accounting
standards are specifically referred to on the bottom of page 2
of the declaration (page 5 of the pdf file itself)? Provide
their titles and a brief statement of the topics covered by
these standards.

3.) Again refer to Fastow's declaration. What financial
ratios were specific targets at Enron? How might transactions
that would be subject to the requirements of Statements of
Financial Accounting Standards 125 and 140, as well as
assistance of investment bankers, contribute to meeting those
operational targets?

4.) One Enron employee, Sherron Watkins, initially wrote to
Chairman and Chief Executive Kenneth Lay in protest of the
financing transactions and financial reporting she observed. How
difficult do you think it was for her to take an ethical action
in the Enron environment at the time? What personal and
professional well being did she face losing by taking her stance
in the matter?

Yet Another Executive Looting of a CorporationThe Securities and Exchange Commission
has announced the filing of securities fraud charges against
three former top officers of an operator of national restaurant
chains in connection with their receipt of approximately one
million dollars in undisclosed compensation, participation in
undisclosed related party transactions, and financial statement
fraud from 2000 to 2004. The SEC charges were filed against Buca,
Inc.'s former CEO, Joseph Micatrotto, the company's former CFO,
Greg Gadel, and its former Controller, Daniel J. Skrypek. Buca
is a Minneapolis, Minn., company that operates the Buca di Beppo
and Vinny T's of Boston national restaurant chains. "Buca's top
officers created a tone at the top and a corporate culture that
allowed them to loot the company and engage in a financial
fraud," stated Linda Thomsen, the SEC's Director of Enforcement.
"Such conduct is a fundamental violation of the trust placed in
corporate officers by public shareholders and cannot be
countenanced."
"SEC FILES FRAUD CHARGES AGAINST FORMER RESTAURANT EXECUTIVES
FOR UNDISCLOSED COMPENSATION AND ACCOUNTING FRAUD; FORMER CEO
AGREES TO PAY $500,000 CIVIL PENALTY," AccountingEducation.com,
June 22, 2006 ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=143074

Jensen Comment
In 2005 the external auditor of Buca was Deloitte and Touche.

University of California gets a settlement from Citigroup
as part of its losses in the WorldCom accounting scandalCitigroup has agreed to pay the
University of California
more than $13 millionto settle a
lawsuit over liability for the university’s investments in
WorldCom, a company that collapsed in 2002. The university sued
over inaccurate analyses of WorldCom, which led UC to pay more
than it would have otherwise to buy stock in the company.Inside Higher Ed, April 7, 2006 ---
http://www.insidehighered.com/news/2006/04/07/qt

The global economy
for illicit goods is massive, but by definition impossible
to measure. What we do know is that it is getting bigger.
The number of counterfeit items seized at European Union
borders has increased by more than 1,000%, rising to over
103 million in 2004 from 10 million in 1998. At U.S.
borders, seizures of counterfeit goods have more than
doubled since 2001. Even allowing for improved detection
rates, there is little doubt that the situation is getting
worse.

Today the EU and the
U.S. will launch a joint action strategy on the global
enforcement of intellectual-property rights. The
groundbreaking agreement between the EU and the U.S.
envisages closer customs cooperation, including more data
sharing. There are plans for joint border enforcement
actions, including in third countries, and the creation of
joint networks of EU and U.S. diplomats in third countries
working on intellectual-property protection.

Twenty years ago,
counterfeiting might have been regarded as a problem chiefly
for the makers of expensive handbags. In the 1980s, 70% of
firms affected by counterfeiting were in the luxury sector.
But in 2004, more than 4.4 million items of fake foodstuffs
and drinks were seized at EU borders, an increase of 196%
over the previous year. In the U.S., seizures of counterfeit
computers and hardware tripled from 2004 to 2005. There are
also fake electrical appliances, car parts and toys. Even
airplane parts are being pirated: The Concorde crash of 2000
appears to have been caused by a counterfeit part that had
fallen off another aircraft.

Perhaps most worrying
is the booming trade in counterfeit medicines, which were
reckoned to account for almost 10% of world trade in
medicines in 2004. A recent study in the Lancet concluded
that up to 40% of products labeled as containing the
antimalarial drug artusenate contain no active ingredients.
Most of these fake drugs are headed for the world's poorest
countries. The World Health Organization estimates that 60%
of counterfeit medicine cases occur in developing countries.

The popular view is
that buying a fake is a win-win game, so long as you know
what you are paying for. Everyone enjoys a bargain. But it's
far too easy -- and wrong -- to write off this kind of crime
as not really harmful to anyone. Counterfeiting is big
business for criminal organizations that can affect entire
sectors of the international economy. And when pirates move
into fake medicines and fake car-parts, we move from
rip-offs to potential tragedy.

The scale of
counterfeiting matters enormously for the EU and the U.S.,
who compete on their reserves of innovation, invention and
high-quality design and production. Piracy strips that
comparative advantage away. Our economies are adapting to
low-cost competition from the developing world. We have a
right to expect that our own comparative advantages be
respected.

But it is not just
the developed world that has a stake in this fight.
Tolerating counterfeiting almost inevitably backfires.
Developing countries that tolerate the existence of a
parallel illicit economy in their market will quickly lose
the confidence of foreign investors and services traders,
and the technology transfer that these bring with them. They
also undermine the development of innovative and creative
businesses in their own economy. Although China is now
taking steps to better enforce its intellectual-property
laws, it has for too long turned a blind eye to these
problems. Ironically, customs authorities are now
intercepting increasing numbers of Beijing 2008 Olympic
knockoffs.

It is time for a new
global strategy and a much tougher global approach. All
members of the World Trade Organization have signed
agreements to fight counterfeiting. The new focus has to be
on enforcing the rules we already have against
counterfeiting and piracy in particular. Countries that have
signed up to these rules should no longer expect an easy
ride if they don't implement them.

On Wednesday, the Federal
Communications Commission voted to require Internet
telephone companies to contribute to the Universal Service
Fund (USF). The move means higher phone bills for Internet
telephone service as providers pass this new cost on to
customers. But it also means that a Republican-run
regulatory agency is expanding a federal subsidy that should
have been phased out long ago.

The concept of "universal service"
dates back more than 70 years to a time when stringing wires
together to bring telephone service to loosely populated
areas was expensive. The goal was to keep local phone rates
low and increase subscribers. This policy long ago fulfilled
its purpose: By the mid-1990s, nearly 95% of U.S. households
had a telephone. A competitive telecom marketplace with
proliferating wireless technologies and multiple service
providers had developed.

Nevertheless, the USF lives on.
What's worse, the FCC has now determined that Internet
telephony should be roped in to this anachronistic
regulatory framework. FCC Chairman Kevin Martin says this
levy is necessary for parity purposes. But the best way to
produce a level telecom playing field isn't by burdening new
technologies with old regulations. It's by phasing out such
regulations for everyone.

The USF has become a tool for
redistributing wealth from urban phone customers to their
rural counterparts, says Randolph May, a former FCC lawyer
who now heads the Free State Foundation think tank. The
irony, says Mr. May, "is that the subsidies tend to flow
from more densely populated areas like New York or Baltimore
to less densely populated areas. So, in effect, you've got
many places where poor people are subsidizing rich people in
Aspen." Given that near-universal service now exists, why
not subsidize only those low-income customers who truly need
it?

The main beneficiaries of the
status quo are rural telephone companies, some of which
receive as much as 70% of their revenue from the USF. More
than a thousand such entities still exist nationwide, and
they have powerful allies in Congress, especially Senate
Commerce Chairman Ted Stevens of Alaska. We knew many in
Washington were eager to classify the Internet as nothing
more than a glorified telephone subject to the usual telecom
taxes and rules. But we were hoping a Republican-controlled
FCC wouldn't let that happen.

Parents who forget to do their
homework before choosing a state-sponsored college savings
plan are being sold funds with the highest fees, according
to a survey of state-sponsored 529 college savings plans
just published in the Journal of American Taxation
Association. The Securities and Exchange Commission (SEC) is
investigating the sales practices of 529 plans and has
reportedly requested a copy of the article. “Our results are
consistent with the fact that it’s so difficult to choose
the right plan that people ask investment brokers for
advice, and brokers are selling investors the high-fee
funds,” University of Kansas (KU) professor and co-author of
the survey, Raquel Alexander said in a prepared statement
announcing the results.

Taxpayers have currently invested
more than $65 billion in 529 college Savings Plans, which
allow investors to make after-tax contributions to the plans
and withdraw funds, tax-free, to use for qualified college
expenses. That amount is expected to climb to $300 billion
by 2010, according to Investment News.

Freddie Mac said it will pay $410
million to settle securities class-action and shareholder
derivative lawsuits stemming from its restatement of
earnings from 2000 to 2002.

The announcement comes just two
days after Freddie Mac announced a $3.8 million settlement
with the Federal Election Commission to resolve allegations
that the government-sponsored mortgage giant violated
campaign-finance laws.

"Today's settlement, like the
settlement announced earlier this week with the Federal
Election Commission, enables this management team to resolve
past issues so that we can focus squarely on meeting our
important housing mission, running the business well and
serving the needs of our customers," said Richard Syron,
Freddie Mac's chief executive.

The $410 million payment will go
into a fund that will repay several Ohio pension funds and
other investors who purchased Freddie Mac stock between July
15, 1999, and Nov. 20, 2003.

Ohio Attorney General Jim Petro,
who negotiated the settlement with Freddie Mac, alleged that
Freddie "misrepresented its financial condition during that
period."

Freddie Mac said, "the settlement
is...based on corporate-governance reforms instituted by the
company under its current management." It added that it
didn't admit wrongdoing. Freddie Mac didn't admit wrongdoing
in the Federal Election Commission case either.

Freddie Mac expects the settlement
to lower its first-quarter 2005 net income by $220 million
after taxes.

One of the larger SEC civil penalties for accounting fraudIn one of the largest civil penalties
the Securities and Exchange Commission has ever obtained against
an individual in an accounting-fraud case, a federal judge has
ordered Henry C. Yuen, former chief executive officer of
Gemstar-TV Guide International Inc., to pay $22.3 million for
his role in a fraud that led the company to overstate revenue by
more than $225 million between 2000 and 2002. The ruling comes
four years after the SEC launched its investigation of Gemstar,
a once highflying Hollywood company that publishes TV Guide
magazine and holds patents on technology used for cable- and
satellite-television programming guides. Earlier this year
following a three-week trial, U.S. District Judge Mariana
Pfaelzer found Mr. Yuen liable for securities fraud, lying to
auditors and falsifying Gemstar's books.
Jane Spencer and Kara Scannell, "Gemstar Ex-CEO Is Ordered To
Pay $22.3 Million: Henry Yuen's Civil Penalty Is Among
Largest Sought By SEC Against Individual," The Wall Street
Journal, May 9, 2006; Page A3 ---
http://online.wsj.com/article/SB114713467418347300.html?mod=todays_us_page_one
Jensen Comment
The outside auditor was KPMG.

General Motors Corp. Chairman and
Chief Executive Rick Wagoner, in a letter to shareholders,
apologized for a series of accounting errors and promised
the auto maker is "working diligently to get things moving
in the right direction -- quickly" following a huge loss
last year.

In a letter to shareholders
released Friday in conjunction with the firm's proxy
statement, the CEO said GM has "a renewed commitment to
excellence and transparency in our financial reporting." The
proxy also disclosed that his 2005 compensation fell by
nearly 50%.

GM faces six separate Securities
and Exchange Commission investigations of accounting
problems and has received a subpoena from a federal grand
jury in connection with its accounting for payments received
from suppliers.

"While I will not offer excuses, I
do apologize on behalf of our management team, and assure
that we will strive to deserve your trust," Mr. Wagoner
wrote in the letter. "The fact is that errors were made, and
we can't change that. What we have done is disclose our
mistakes and work as diligently as we can to fix them."

"Recognizing that a large part of
these losses resulted from GM's significant legacy cost
burden and the difficulty of adjusting structural costs in
line with falling revenues, we noted Mr. Wagoner's strong
direction and steady leadership in systematically and
aggressively implementing a plan to restore the Corporation
and North American operations to profitability and positive
cash flow," the committee said in the proxy.

GM reported that Mr. Wagoner
received $5.48 million in total pay last year, down nearly
50% from his total 2004 pay. Mr. Wagoner's 2005 salary
remained unchanged at $2.2 million, but he didn't receive a
bonus for the year, while he received a $2.46 million bonus
in 2004. GM previously announced that GM's top officers took
pay cuts and received no bonuses for 2005.

Despite the compensation cuts, Mr.
Wagoner received 400,000 options valued at $2.88 million in
2005. The year before, he got the same amount of options,
which were valued at $5.14 million when they were granted.
Neither Mr. Wagoner nor other top GM executives exercised
options in 2005. Other GM executives took similar cuts in
total pay.

Deloitte's Concept of Pricing Options is Legally and Ethically
Questionable

So when new hires began complaining
that the company's volatile share price meant that
colleagues who had arrived just days earlier were receiving
stock options worth thousands of dollars more, Micrel
executives moved to satisfy the troops. They raised with
their auditor, Deloitte & Touche, the idea of adopting a new
options pricing strategy similar to one that other tech
companies, including Microsoft, used at the time.

Instead of granting options at the
market price on a new employee's hire date, Micrel proposed
setting the price at the lowest point in the 30 days from
when the grant was approved.

It seemed like an ideal solution.
The 30-day window could help Micrel attract and reward new
hires on a more equal footing, while helping to retain
existing employees. And if it were extended up the corporate
ladder, the prospect of built-in gains and tax breaks, worth
millions of dollars, could enrich senior executives.

But the 30-day pricing method,
which Micrel adopted in mid-1996, was an aggressive move
legally and financially. In hindsight, it was also a major
misstep.

Nearly five years later, Deloitte
reversed its opinion and urged Micrel to restate its
financial reports. The Internal Revenue Service came banging
on its door. And today, Micrel and Deloitte are passing
blame back and forth in court.

Micrel is hardly the only firm
ensnared in such a mess. What began as a creative solution
among a handful of technology firms to address recruitment
issues soon became common practice in Silicon Valley. It
appears the practice also became a way to enrich chief
executives and other top managers.

The result is a nationwide scandal
with major accounting, corporate governance, tax and
disclosure ramifications. Dozens, perhaps hundreds, of
companies are caught up in a giant civil and criminal law
enforcement sweep by the Justice Department, the I.R.S. and
the Securities and Exchange Commission.

It is no coincidence that stock
option abuses are once again taking center stage in an
unfolding scandal. The easy money that options can rain down
on recipients motivated many of the numbers games that
companies played with their quarterly earnings during the
stock market boom, leading to numerous accounting fraud
prosecutions at Enron, WorldCom and others.

In the latest scandal, companies
seem to have handed out stock options that were already "in
the money" on the date of grant, undermining the idea of
using options as a pay-for-performance tool. The practice
appears to have been widespread from the early 1990's to
2002, and possibly beyond.

Handing out in-the-money options is
not illegal as long as the grants are disclosed to
shareholders. At the time, in-the-money options had to be
counted as an expense on the company's books. (New rules now
require companies to routinely deduct options as an
expense.) Failure to disclose or to deduct in-the-money
options from income could lead to securities fraud charges.
And because such options do not qualify for tax breaks once
they are exercised, such grants raise tax fraud issues, too.

The Micrel case and others raise
troubling questions about how companies that were pushing
the envelope of accounting and tax practice were able to get
the blessings of auditors and lawyers. And the widening
scandal reveals the extent to which boards of directors,
especially the compensation committees that approve option
grants, may have failed to do their jobs.

"It appears, from the S.E.C. and a
number of reports that are coming up daily, that there was a
systemic problem at a lot of companies," said Bradley E.
Beckworth, a plaintiffs' attorney who has filed one of the
first class-action lawsuits against Brocade Communications
and KPMG, its auditor, for options backdating. "If these
accounts turn out to be true, you have to ask the question,
Who was the gatekeeper here?"

Micrel, by most accounts, is one of
the last technology companies where one might expect to find
problems. While the chip manufacturer was one of the
high-flying growth businesses of the 1990's, it was
different in several respects from most of the era's
fledgling public companies.

Its founder and longtime chief
executive, Raymond D. Zinn, a 68-year-old engineer, is a
Mormon who calls honesty his guiding rule. And unlike many
of its technology rivals, Micrel's own profits, not venture
financing, fueled its growth until it went public in 1994.

But like many high-tech firms in
the mid-1990's, Micrel went on a hiring binge. The Bay Area
was booming with opportunities for ambitious people.
Companies were growing at astronomical rates and desperately
needed talent to fill new jobs. And instead of higher
salaries, companies preferred to grant stock options to lure
new employees.

Micrel, a company that had a few
hundred employees but was adding two or three new people a
week, began facing a fairness problem in its options awards
in mid-1996.

The AFL-CIO, one of the largest
shareholders in public companies, is seeking to learn about
the role that big accounting firms may have played in the
burgeoning stock options timing affair.

In letters Friday, the labor
federation asked the Big Four accounting firms -- Ernst &
Young, PricewaterhouseCoopers, KPMG and Deloitte & Touche --
to provide information on their potential involvement as
outside auditors for companies now under federal
investigation for possible rigging of option grants to boost
their value to the recipients.

"Given the potential damage to
shareholders due to options backdating, I am concerned about
what role (name of accounting firm) may or may not have had
in the backdating ...," the AFL-CIO's secretary-treasurer,
Richard Trumka, said in the letters to the chief executives
of the four firms, which were made public Monday. "I urge
you to describe what steps are being taken to determine
(name of firm)'s involvement in stock option backdating
where it has occurred."

In backdating, options are issued
retroactively to coincide with low points in a company's
share price, a practice that can fatten profits for options
recipients when they sell their shares at higher market
prices. Backdating options can be legal as long as the
practice is disclosed to investors and properly approved by
the company's board. In some cases, however, the practice
can break federal accounting and tax laws.

Last week, government officials
said they want to know what roles corporate directors as
well as outside attorneys, accounting firms and compensation
consultants might have played in helping executives
manipulate the timing of option grants to enrich themselves
and their colleagues.

More than 100 public companies,
many of them in the technology sector, are under scrutiny by
the Securities and Exchange Commission in the affair. The
Justice Department is investigating scores of companies for
possible criminal violations. And the Internal Revenue
Service is looking at possible tax-law violations in option
grants by some companies.

The potential cost to shareholders
escalated Friday, when computer chip supplier Broadcom Corp.
said it may need to boost a charge it takes to $1.5 billion
or more for option accounting flaws -- double what it had
estimated in July.

On Monday, chip maker Nvidia Corp.
and software maker Wind River Systems Inc. both warned that
they will miss regulatory deadlines for filing their most
recent quarterly reports, joining a long list of tardy tech
companies scrambling to clean up a stock options mess. The
delay will expose both Nvidia and Wind River to being
dropped from trading on the Nasdaq Stock Market. But that
process takes several months, giving the companies time to
comply with the SEC's reporting rules before getting bounced
from the Nasdaq.

The AFL-CIO has some $400 billion
in assets and is a major investor in companies, including
many of those that are under investigation.

That question, frequently heard
during financial scandals earlier this decade, is being asked
again as an increasing number of companies are being probed
about the practice of backdating employee stock options, which
in some cases allowed executives to profit by retroactively
locking in low purchase prices for stock.

For the accounting industry, the
question raises the possibility that the big audit firms didn't
live up to their watchdog role, and presents the Public Company
Accounting Oversight Board, the regulator created in response to
the past scandals, its first big test.

"Whenever the audit firms get
caught in a situation like this, their response is, 'It wasn't
in the scope of our work to find out that these things are going
on,' " said Damon Silvers, associate general counsel at the
AFL-CIO and a member of PCAOB's advisory group. "But that logic
leads an investor to say, 'What are we hiring them for?' "

Others, including accounting
professionals, aren't so certain bookkeepers are part of the
problem. "We're still trying to figure out what the auditors
needed to be doing about this," said Ann Yerger, executive
director of the Council of Institutional Investors, a trade
group. "We're hearing lots of things about breakdowns all
through the professional-advisor chains. But we can't expect
audit firms to look at everything."

One pressing issue: Should an
auditor have had reason to doubt the veracity of legal documents
showing the grant date of an option? If not, it is tough for
many observers to see how auditors could be held responsible for
not spotting false grant dates.

"I don't blame the auditors for
this," said Nell Minow, editor of The Corporate Library, a
governance research company. "My question is, 'Where were the
compensation committees?' "

To sort out the issue, the PCAOB
advisory group -- comprising investor advocates, accounting
experts and members of firms -- last week suggested the agency
provide guidance to accounting firms on backdating of stock
options. A spokeswoman for the board said, "We are looking to
see what action they may be able to take."

To date, more than 40 companies
have been put under the microscope by authorities over the
timing of options issued to top executives. Federal authorities
are investigating whether companies that retroactively applied
the grant date of options violated securities laws, failed to
properly disclose compensation and in some cases improperly
stated financial results. A number of companies have said they
will restate financial statements because compensation costs
related to backdated options in questions weren't properly
booked.

All of the Big Four accounting
firms -- PricewaterhouseCoopers LLP, Deloitte & Touche LLP, KPMG
LLP and Ernst & Young LLP -- have had clients implicated. None
of these top accounting firms apparently spotted anything wrong
at the companies involved. One firm, Deloitte & Touche, has been
directly accused of wrongdoing in relation to options
backdating. A former client, Micrel Inc., has sued the firm in
state court in California for its alleged blessing of a
variation of backdating. Deloitte is fighting that suit.

The big accounting firms haven't
said whether they believe there was a problem on their end.
Speaking at the PCAOB advisory group's recent meeting, Vincent
P. Colman, U.S. national office professional practice leader at
PricewaterhouseCoopers, said his firm was taking the issue
"seriously," but more time is needed "to work this through" both
"forensically" and to insure this is "not going to happen going
forward."

Robert J. Kueppers, deputy chief
executive at Deloitte, said in an interview: "It is one of the
most challenging things, to sort out the difference in these
[backdating] practices. At the end of the day, auditors are
principally concerned that investors are getting financial
statements that are not materially misstated, but we also have
responsibilities in the event that there are potential illegal
acts."

While the Securities and Exchange
Commission has contacted the Big Four accounting firms about
backdating at some companies, the inquiries have been of a
fact-finding nature and are related to specific clients rather
than firmwide auditing practices, according to people familiar
with the matter. Class-action lawsuits filed against companies
and directors involved in the scandal haven't yet targeted
auditors.

Backdating of options appears to have
largely stopped after the passage of the Sarbanes-Oxley
corporate-reform law in 2002, which requires companies to
disclose stock-option grants within two days of their
occurrence.

Backdating practices from earlier
years took a variety of forms and raised different potential
issues for auditors. At UnitedHealth Group Inc., for example,
executives repeatedly received grants at low points ahead of
sharp run-ups in the company's stock. The insurer has said it
may need to restate three years of financial results. Other
companies, such as Microsoft Corp., used a monthly low share
price as an exercise price for options and as a result may have
failed to properly book an expense for them.

At the PCAOB advisory group
meeting, Scott Taub, acting chief accountant at the Securities
and Exchange Commission, said there is a "danger that we end up
lumping together various issues that relate to a grant date of
stock options." Backdating options so an executive can get a
bigger paycheck is "an intentional lie," he said. In other
instances where there might be, for example, a difference of a
day or two in the date when a board approved a grant, there
might not have been an intent to backdate, he added.

"The thing I think that is more
problematic is there have been some allegations that auditors
knew about this and counseled their clients to do it," said
Joseph Carcello, director of research for the
corporate-governance center at the University of Tennessee. "If
that turns out to be true, they will have problems."

Suspected Fraud: Attorneys, Auditors, Others Getting
Attention In Options Timing Affair"It's hard to believe ... that the
executives did this all by themselves," Sen. Charles Grassley,
R-Iowa, said at a hearing Wednesday. "And to be honest, the idea
that all executives at different companies came up with this
idea at the same time stretches the imagination." Grassley said
he planned to write to "several major corporations" that have
engaged in backdating of stock options, asking them to provide
the minutes of board meetings in which directors discussed the
matter as well as documents from attorneys, accountants and
consultants who assisted. In backdating, options are issued
retroactively to coincide with low points in a company's share
price, a practice that can fatten profits for options recipients
when they sell their shares at higher market prices. Backdating
options can be legal as long as the practice is disclosed to
investors and properly approved by the company's board. In some
cases, however, the practice can run afoul of federal accounting
and tax laws. "We need to understand and bring enforcement
action against all the actors who were involved with this
abusive scandal," Grassley declared.
"Attorneys, Auditors, Others Getting Attention In Options Timing
Affair," SmartPros, September 11, 2006 ---
http://accounting.smartpros.com/x54672.xml

Doral Financial Settles Financial Fraud ChargesThe Securities and Exchange Commission
on September 19, 2006 filed financial fraud charges against
Doral Financial Corporation, alleging that the NYSE-listed
Puerto Rican bank holding company overstated income by 100
percent on a pre-tax, cumulative basis between 2000 and 2004.
The Commission further alleges that by overstating its income by
$921 million over the period, the company reported an apparent
28-quarter streak of “record earnings” that facilitated the
placement of over $1 billion of debt and equity. Since Doral
Financial’s accounting and disclosure problems began to surface
in early 2005, the market price of the company’s common stock
plummeted from almost $50 to under $10, reducing the company’s
market value by over $4 billion. Without admitting or denying
the Commission’s allegations, Doral Financial has consented to
the entry of a court order enjoining it from violating the
antifraud, reporting, books and records and internal control
provisions of the federal securities laws and ordering that it
pay a $25 million civil penalty. The settlement reflects the
significant cooperation provided by Doral in the Commission’s
investigation.
"DORAL FINANCIAL SETTLES FINANCIAL FRAUD CHARGES WITH SEC AND
AGREES TO PAY $25 MILLION PENALTY," AccountingEducation.com,
September 28, 2006 ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=143606

Question
What is laddering in the IPO markets?

Definition of Laddering:This practice artificially inflates the value of
stocks. Laddering occurs when underwriters of IPOs obtain
commitments from investors to purchase shares again (after they
have begun trading publicly) at a specified, higher price.
www.securitiesfraudfyi.com/securities_fraud_glossary.html

The financial-services company
reached a memorandum of understanding with investor
plaintiffs to settle the federal case, according to Melvyn
Weiss, chairman of the executive committee of six law firms
representing plaintiffs.

A J.P. Morgan spokesman confirmed
the agreement in principle, which is subject to court
approval. He said it would have "no material adverse affect
on our financial results," indicating the bank has likely
already set aside funds to cover it.

The lawsuit accused underwriters of
improperly pumping extra air into the stock-market bubble in
1999 and 2000 by requiring investors who got shares of hot
initial public offerings to buy more shares at higher prices
once trading began.

The alleged practices by the 54
underwriter defendants could have worsened losses of
investors who bought at the higher prices when the bubble
burst, the plaintiffs charged. The practices at issue became
known as "laddering."

"Charities Tied to Doctors Get Drug Industry Gifts," by Reed
Abelson, The New York Times, June 28, 2006 ---
Click Here

Although outside researchers raised
questions about the study's conclusions, the doctor betrayed
little doubt. "We believe these results challenge current
medical practice and recommendations," said Dr. Costanzo,
who predicted many patients might benefit.

Dr. Costanzo did disclose to the
audience that she was a paid consultant with stock in the
device's maker, a Minnesota company called CHF Solutions.
But she omitted another potentially important detail: CHF
Solutions was also one of the largest donors to the
nonprofit research foundation that had overseen the study.
The company contributed about $180,000 in 2004, according to
the foundation's federal filings.

Nor did she note that the nonprofit
entity, the Midwest Heart Foundation, was in turn an arm of
the thriving for-profit medical group outside of Chicago
where Dr. Costanzo and more than 50 of her fellow doctors
treat heart patients — in many cases using products and
drugs made by CHF Solutions and other big donors to their
charity. Although the CHF Solutions device has generally
been slow to catch on, physicians at Dr. Costanzo's medical
group have treated many patients with the company's
filtration system.

The Midwest Heart Foundation, and
the way it has become quietly interwoven into its doctors'
professional lives, is far from unique. Around the country,
doctors in private practice have set up tax-exempt charities
into which drug companies and medical device makers are,
with little fanfare, pouring donations — money that adds up
to millions of dollars a year. And some medical experts see
that as a big problem.

The charities are typically set up
to engage in medical research or education, and the doctors
involved defend those efforts as legitimate charitable
activities that benefit the public. But because they operate
mainly under the radar, the tax-exempt organizations
represent what some other doctors, as well as regulators and
industry consultants, say is a growing conduit for industry
money. The payments, they say, can bias the treatment
decisions of physicians, may lead to suspect research
findings and at times may even risk running afoul of
anti-kickback laws.

Federal officials are starting to
take notice of such tax-exempt charities, which critics say
are becoming increasingly popular as other forms of industry
support to physicians — like lucrative consulting agreements
that involve little actual work — have come under scrutiny
from regulators and others worried about the potential
conflicts.

The potential for abuse by these
charities is clear, critics say. "It obviously sets a
fertile ground for conflict of interest and misuse of
funds," said Dr. Robert M. Califf, vice chancellor for
clinical research at Duke University Medical Center.

The charities at issue are not
philanthropies like the Bill and Melinda Gates Foundation
that dispense grants for medical research but remain
independent of any one group of doctors or medical practice.
Instead, the charities drawing scrutiny are set up by
doctors in private practice and are closely linked to those
doctors' for-profit medical groups.

The Midwest Heart Foundation, which
has received millions of dollars from medical industry
donors, including the drug makers Amgen and AstraZeneca, and
the Cordis and Scios units of Johnson & Johnson, says it
stands behind its charitable work, which currently involves
about 30 studies and dozens of doctor-education lectures
each year.

Dr. Mark Goodwin, a managing
partner for the Midwest Heart for-profit practice, said the
foundation was created to help prevent potential conflicts
by keeping the industry money separate from the doctors'
private practice. Companies contribute to the foundation, he
said, because they can rely on its research and the doctors
involved can enroll large numbers of patients in studies.
"We are able to deliver excellent research to our community
in a timely fashion," Dr. Goodwin said, "and we are proud of
it."

Recent years have brought a cascade
of scandals at the United Nations, of which the wholesale
corruption of the Oil-for-Food relief program in Iraq has
been only the most visible. We still do not know the full
extent of these debacles—the more sensational ones include
the disappearance of UN funds earmarked for tsunami relief
in Indonesia and the exposure of a transnational network of
pedophiliac rape by UN peacekeepers in Africa—and we may
never know. What we do know is that an assortment of
noble-sounding efforts has devolved into enterprises marked
chiefly by abuse, self-dealing, and worse.

Seen by many, including many
Americans, as the chief arbiter of legitimacy in global
politics, the UN is understood by others to be the only
institution standing between us and global anarchy. If that
is so, the portents are not promising. The free world is
grappling with threats from the spread of radical Islam to
North Korea’s nuclear blackmail and Iran’s pursuit of
nuclear bombs. The UN, despite its trophy case of Nobel
prizes, has failed so far to curb any of these, just as it
failed abysmally to run an honest or effective sanctions
program in Saddam Hussein’s Iraq. Currently it is gridlocked
over matters as seemingly straightforward as cleaning up its
own management department.

In the effort to address the UN’s
manifold problems, there have been audits, investigations,
committees, reports, congressional hearings, action plans,
and even a handful of arrests by U.S. federal prosecutors.
There have been calls for Secretary-General Kofi Annan to
step down before his second term expires at the end of this
year. Solutions have been sought by way of better
monitoring, whistleblower protection, the accretion of new
oversight bodies, and another round of conditions attached
to the payment of U.S. dues. On top of the broad reforms of
the early 1990’s, the sweeping reforms of 1997, the further
reforms of 2002, and the world summit for reform in 2005,
still more plans for reform are in the works.1 To its
external auditors, internal auditors, joint inspections
unit, eminent-persons panels, executive boards, and many
special consultants, the UN has recently added an Office of
Ethics—now expected to introduce in May what will presumably
become an annual event: “UN Ethics Day.”

Is any of this likely to help?
Behind the specific scandals lies what one of the UN’s own
internal auditors has termed a “culture of impunity.” A
grand committee that reports to itself alone, the UN
operates with great secrecy and is shielded by diplomatic
immunity. One of its prime defenses, indeed, is the sheer
impenetrability of its operations: after more than 60 years
as a global collective, it has become a welter of so many
overlapping programs, far-flung projects, quietly vested
interests, nepotistic shenanigans, and interlocking
directorates as to defy accurate or easy comprehension, let
alone responsible supervision.

But let us try.

One clear sign of how badly things
have gone with the UN is the difficulty of tallying even so
basic a sum as the system’s real budget. Nowhere does the UN
present a full and clear set of accounts, and statistics
vary even within individual agencies and programs.

The UN’s current “core” annual
budget is $1.9 billion—but the “core” is itself but a
fraction of the actual budget. Around it are wrapped
billions more in funding provided by “voluntary
contributions” from private and corporate donors,
foundations, and member states, including, to a large
extent, the United States. These sums are shuffled around in
various ways, with UN agencies in some instances paying or
donating to each other. For instance, the UN Development
Program (UNDP) operates with its own “core” budget of about
$900 million a year but handles about $3 billion per
year—or, depending on whom you ask and what you count, $4.5
billion per year.

According to Mark Malloch Brown,
the UN chief of staff who has just been promoted to the post
of Deputy Secretary-General, the total budget for all
operations under direct control of the Secretariat comes to
roughly $8-9 billion per year. Adding in just a few of the
larger agencies like UNDP (at, let us say, $4 billion),
UNICEF ($2 billion or so), and the World Food Program ($2-3
billion) already brings the grand total to somewhere between
$16 and $18 billion, again depending on whom you listen to
and what you count. On UN websites devoted to procurement,
where the idea is not to minimize the official amount of UN
spending but on the contrary to attract suppliers to a large
and thriving operation, the estimate of money spent yearly
on goods and services by the entire UN system comes to $30
billion, or more than 15 times the core budget of $1.9
billion on which reformers have focused.

Staff numbers are likewise a matter
of mystery. The new ethics office proposes to offer its
services to 29,000 UN employees worldwide. That number is
well short of the total staff of the Secretariat plus the
specialized agencies alone, which, according to Malloch
Brown, consists of some 40,000 people. And that figure
itself does not include local staffs—such as the 20,000
Palestinians who work for the UN Works and Relief Agency (UNWRA)
or the many employees, some long-term, others transient, at
hundreds of assorted UN offices, projects, and operations
worldwide, or the more than 85,000 peacekeepers sent by
member states but carrying out UN orders and eating
UN-supplied rations bought via UN purchasing departments.
Whereas the number of UN member states has almost quadrupled
since 1945 (from 51 to 191), the number of personnel has
swollen many times over, from a few thousand into somewhere
in the six figures.

Little of this system is open to
any real scrutiny even within the UN, and no single
authority outside the UN has proved able to compel any
genuine accounting. Moreover, even though there can no
longer be any doubt that the scale of the rot is large, the
UN’s top management continues to insist to the contrary.
Take the central scandal of recent UN history—namely,
Oil-for-Food. Last October, Paul Volcker’s UN-authorized
probe into Oil-for-Food submitted its fifth and final report
on that relief program, which in its seven years of
operation had become a vehicle for billions in kickbacks,
payoffs, and sanctions-busting arms traffic. By January of
this year, after first having declared that he was taking
responsibility for the debacle, Kofi Annan was spinning a
different story, telling a London audience that “only one
staff member was found to maybe have taken some $150,000 out
of a $64-billion program.”

This was an artful lie. The staff
member in question was Benon Sevan, whom Annan had appointed
to run Oil-for-Food for six of its seven years. If indeed
Sevan took no more than this relative pittance, then Saddam
Hussein scored the biggest bargain in the history of
kickbacks. According to Senator Norm Coleman’s independent
investigation into Oil-for-Food, the real figure for Sevan’s
take was $1.2 million. Clearing up this discrepancy is
difficult, however, because Sevan, who was allowed by Annan
to retire to his native Cyprus on full UN pension, is
outside the reach of U.S. law and has denied taking
anything.

In any case, the corruption hardly
ended with Sevan. Instances that appear to have slipped the
Secretary-General’s mind include another member of his inner
circle, the French diplomat Jean-Bernard Merimée, who by his
own admission took a payoff from Saddam while serving as
Annan’s handpicked envoy to the European Union. Within the
UN agencies working with Annan’s Secretariat on
Oil-for-Food, Volcker confirmed “numerous [further]
allegations of corrupt behavior and practices,” embracing
“bid-rigging, conflicts of interest, bribery, theft,
nepotism, and sexual harassment.” He also noted that the UN
lacked controls on graft, failed to investigate many cases,
and failed to act upon some of those it did explore.
Finally, Volcker calculated that UN agencies had kept for
themselves at least $50 million earmarked to buy relief for
the people of Iraq.2

Nor do the sheer monetary amounts
even begin to convey the extent of the damage done by UN
labors in Iraq. Annan’s office had the mandate of the
Security Council, plus a $1.4-billion budget, to check oil
and relief contracts for price fiddles, to monitor oil
exports in order to prevent smuggling, and to audit UN
operations. In the event, Oil-for-Food spent far more money
renovating its offices in New York than checking the terms
of Saddam’s contracts, and ignored the smuggling even when
Saddam in 2000 opened a pipeline to Syria. The result of
what Annan now placidly describes as “instances of
mismanagement”—as if someone forgot to reload the office
printer—was that Saddam skimmed and smuggled anywhere from
$12 billion (according to the incomplete numbers supplied by
Volcker) to $17 billion or more (according to the more
comprehensive totals provided by Senator Coleman’s staff).

And what did Saddam do with those
profits?

Continued in this commentary.

Are lawyers padding expense billings?The career of Matthew Farmer, a
junior partner in the Chicago law offices of Holland & Knight
LLP, was on the upswing in December 2004. He had just won a
monthlong trial for Pinnacle Corp., a Midwestern home builder
accused of copyright infringement, and gotten kudos from many of
his partners. But weeks later, after reviewing billing records
in the Pinnacle matter, he decided to leave the 1,200-lawyer
firm. Mr. Farmer, 42 years old, believed his own hours on the
case had been inflated by the partner in charge of billing,
62-year-old Edward Ryan. Fearing he would violate state ethics
rules if he kept quiet, Mr. Farmer blew the whistle to Holland &
Knight lawyers.
Nathan Koppel, "Lawyer's Charge Opens Window On Bill Padding,"
The Wall Street Journal, August 30, 2006; Page B1 ---
http://online.wsj.com/article/SB115689325718248915.html?mod=todays_us_marketplace
Jensen Comment
Large accounting firms previously got caught up in bill padding
scandals, particularly inflated airline fare reimbursements ---
http://www.trinity.edu/rjensen/Fraud001.htm#BigFirms

There have been more than 50
accountants sanctioned over 2005 and 2006 for professional
misconduct and few of them have compensated shareholders for
their complicity or neglect. The Associated Press reports
that although sanctioned not to practice public accounting
for between one and ten years by the SEC, these accountants
still prepare, audit or review financial statements for
public companies.

They also remain able to perform
these services for private companies. While firms such as
Arthur Andersen and others have paid huge sums in accounting
damages, the individual accountants have escaped their
professional penance, according to the Associated Press.

The disconnect seems to be an
established communication system that would allow the SEC to
advise state accounting boards of federal sanctions against
rogue accountants. Another aspect of the disconnect is that
state accountancy boards do not have staff to handle the
number or reach of financial scandals such as Cendant, Enron
or WorldCom.

Texas is one of many states facing
this situation. License renewals are not a verifiable method
of finding out about SEC sanctions unless without the
accountant completing the questions truthfully. A spokesman
for the Georgia board told the Associated Press that a CPA
recently renewed his license online without disclosing his
disciplinary action by the SEC.

William Treacy, executive director
of the Texas State Board of Public Accountancy, told the
Associated Press, “We don’t have the staff on board to
manage the extra workload that the profession has been
confronted over the last few years, so we contracted with
the attorney general’s office to provide extra prosecutorial
power.”

One of the problems and potential
fixes to this situation may be to fine accountants. After a
landmark SEC settlement in which three partners at KPMG
agreed to pay a combined fine totaling $400,000 for their
complicity in the $1.2 billion fraud at Xerox, the
Associated Press reports that one of the partners still
holds his license in New York.

David Nolte of Fulcrum Financial
Inquiry told the Associated Press, “The SEC has never sought
serious money from errant CPAs. Unfortunately, the small
fines in the Xerox case set a record of the amount paid, so
everyone else has gotten off easy.”

With the heavy investment in
internal controls and procedures by CPA firms, the human
element of accounting and auditing helps even large CPA
firms fail to identify accounting problems. Members of an
audit team can identify insufficient knowledge,
misrepresentation of information, sloppy accounting or even
simple misrepresentation of information but must be able to
see the warning signs of other risky behavior. The CPA
Journal suggests a 360-degree assessment of members on an
audit team. As a structured, systematic way to collect
information, evaluators include the person’s boss, peers,
direct reports, and even clients.

The Securities and Exchange Commission has taken
disciplinary action against more than 50 accountants in 2005 and 2006 for
misconduct in scandals big and small. But few have paid a dime to compensate
shareholders for their varying levels of neglect or complicity.

It also turns out that nearly half of them continue
to hold valid state licenses to hang out their shingles as certified public
accountants, based on an examination of public records by The Associated
Press.

So while the SEC has forbidden these CPAs from
preparing, auditing or reviewing financial statements for a public company,
they remain free to perform those very same services for private companies
and other organizations that may be unaware of their professional misdeeds.

Some would say the accounting profession has taken
its fair share of lumps, particularly with the abrupt annihilation of Arthur
Andersen LLP and the jobs of thousands of auditors who had nothing to do
with the firm's Enron Corp. account. Meantime, the big auditing firms are
paying hundreds of millions of dollars in damages - without admitting or
denying wrongdoing - to settle assorted charges of professional malpractice.

Individual penance is another matter, however, and
here the accountants aren't being held so accountable.

Part of the trouble is that there doesn't appear to
be an established system of communication by which the SEC automatically
notifies state accounting regulators of federal disciplinary actions. In
several instances, state accounting boards were unaware a licensee had been
disciplined by the SEC until it was brought to their attention in the
reporting for this column. The SEC says it refers all disciplinary actions
to the relevant state boards, so the cause of any breakdowns in these
communications is unclear.

Another obstacle may be that some state boards do
not have ample resources to tackle the sudden swell of financial scandals.
It's not as if, for example, the Texas State Board of Public Accountancy had
ever before dealt with an accounting fraud as vast as that perpetrated at
Houston-based Enron.

"We don't have the staff on board to manage the
extra workload that the profession has been confronted with over the last
few years," said William Treacy, executive director of the Texas board. "So
we contracted with the attorney general's office to provide extra
prosecutorial power."

Treacy said his office is usually notified of SEC
actions concerning Texas-licensed CPAs, but the process isn't automatic.

With other states, communications from the SEC
appear less certain. If nothing else, many boards rely upon license renewals
to learn about SEC actions, but that only works if the applicants respond
truthfully to questions about whether they've been disciplined by any
federal or state agency. A spokeswoman for Georgia's board said one CPA
recently disciplined by the SEC had renewed his license online without
disclosing it.

Ransom Jones, CPA-Investigator for the Mississippi
State Board of Public Accountancy, said most of his leads come from other
accountants, media reports and annual registrations.

"The SEC doesn't necessarily notify the board,"
said Jones, whose agency revoked the licenses of key players in the scandal
at Mississippi-based WorldCom.

Some state boards appear more vigilant than others
in policing their membership. The boards in California and Ohio have
punished most of their licensees who have been disciplined by the SEC since
the start of 2005.

New York regulators haven't yet penalized any
locals targeted by the SEC in that timeframe, though they have taken action
against two disciplined by the SEC's new Public Company Accounting Oversight
Board. It is conceivable that cases are underway but not yet disclosed, or
that some individuals have been cleared despite the SEC's findings. A
spokesman for the New York State Education Department said all SEC referrals
are probed, but not all forms of misconduct are punishable under local
statute. New rules now under consideration would strengthen those
disciplinary powers, he said.

Meanwhile, although the SEC deserves credit for
de-penciling those CPAs who've breached their duties as gatekeepers of
financial integrity, barely any of those individuals have been asked to make
amends financially.

No doubt, except for those elevated to CEO or CFO,
most accountants are not paid as handsomely as the corporate elite. That
said, partners from top accounting firms are were [sic] paid well enough to
cough up more than the SEC has sought, which in most cases has been zero.

Earlier this year, in what the SEC crowed about as
a landmark settlement, three partners for KPMG LLP agreed to pay a combined
$400,000 in fines regarding a $1.2 billion fraud at Xerox Corp. One of those
fined still holds his license in New York.

"The SEC has never sought serious money from errant
CPAs," said David Nolte of Fulcrum Financial Inquiry LLP. "Unfortunately,
the small fines in the Xerox case set a record of the amount paid, so
everyone else has also gotten off easy."

It's not that the CPAs found culpable in scandals
don't deserve a right to redemption, or just to earn a living. Most of the
bans against practicing before the SEC are temporary, spanning anywhere from
a year to 10 years.

But the presumed deterrent of SEC action is
weakened if federal and state regulators don't work together on a consistent
message so bad actors don't get a free pass at the local level.

Fraud Update
This appears to be one of those moral hazard situations in game
theory where it is optimal to break the law and pay the fine.

The Federal government does not
back the debt of Fannie Mae and Freddie Mac. However, since they own the
lion's share of all home mortgages in the U.S., the general perception is
that allowing Fannie and Freddie go bankrupt would bring the economy
crashing down.

It's well-known that Fannie Mae and
Freddie Mac have good friends on Capitol Hill. But last week
the Federal Election Commission shed some light on how
Freddie Mac rewarded its friends. In a settlement with the
FEC, Freddie admitted to illegally raising $1.7 million for
candidates from both parties between 2000 and 2003. In 2001
alone, Freddie Mac's Senior Vice President for Government
Affairs boasted of holding 40 fund-raisers for House
Financial Services Committee Chairman Michael Oxley.

Unfortunately for Freddie, it is
explicitly barred by law from political fund-raising. In the
settlement, Freddie agreed to fork over $3.8 million in
fines. Yet Freddie probably figures it also got its money's
worth. Genuine reform of the two giant "government-sponsored
enterprises" is now stalled on Capitol Hill, thanks in large
part to Mr. Oxley's dutiful service.

Which means it's time for reformers
to turn to Plan B. The Bush Administration could itself take
the opportunity to rein in Freddie and Fannie. An overlooked
provision of the laws that founded the two companies already
gives the Treasury Secretary the power to restrict the duo's
mortgage portfolios that now threaten the U.S. financial
system.

First, some background. Fan and
Fred have lower costs of capital than their competitors
because of the market perception that the government stands
behind their debt. This, in turn, is indispensable to their
business model. Fannie and Freddie between them hold more
than $1 trillion worth of mortgage-backed securities that
they've bought with this cheaper credit.

To make it all work, Fannie and
Freddie must carefully balance the risks that arise from
interest-rate movements, mortgage prepayments and the
different maturities of their debts and assets. The
monumental accounting troubles that both companies have had
in recent years centered around how they account for those
risks and the hedges they use to mitigate them. The danger
that those portfolios could melt down has led critics such
as Alan Greenspan and his successor at the Federal Reserve,
Ben Bernanke, to warn that Fan and Fred pose a "systemic
risk" to the financial system if the size of their
portfolios is not reduced.

It took Congress just weeks to pass
Sarbanes-Oxley in 2002. But -- perhaps because Mr. Oxley has
been spending so much time at Freddie's fund-raisers -- it
can't seem to deal with the far larger financial problems at
Fan and Fred. A watered-down reform bill has passed the
House, but a stronger bill in the Senate shows no sign of
being brought up for a vote anytime soon. Securities
analysts have been telling investors they believe the drive
to rein in the duo is losing momentum. Freddie Mac's
president and COO recently concurred in public. He added
that strict limits on retained portfolios would not be in
the "best interest of the housing finance industry." By
which he meant the best interest of Fannie and Freddie.

Portfolio limits are, however, in
the interest of American taxpayers and the integrity of the
financial system. The law requires that the bonds that
Fannie and Freddie issue explicitly deny that they are
backed by the federal government, but plainly no one
believes that. Otherwise, who in their right mind would
purchase the debt of Fannie Mae, a company with no financial
statements and $11 billion in overstated profit?

This type of situation was foreseen
when Fan and Fred were chartered. Which is why the same
sections of the U.S. Code that require Fannie and Freddie to
disavow any government backing of their debts also require
the companies to get the approval of the Treasury Secretary
before issuing any debt.

Specifically, the law pertaining to
Fannie reads: "[T]he corporation is authorized to issue,
upon the approval of the Secretary of the Treasury, and have
outstanding at any one time obligations having such
maturities and bearing such rate or rates of interest as may
be determined by the corporation with the approval of the
Secretary of the Treasury . . ." (our emphases). The section
of the law dealing with Freddie Mac has similar language.

As we read that, Treasury already
has the power to limit Fannie's and Freddie's borrowing.
What's more, that authority appears to have been granted
specifically out of concern that the debts of the pair might
someday be laid at Treasury's doorstep. But without massive
borrowing, neither Fannie nor Freddie could afford to hold
the hundreds of billions of securities that they currently
do. So limiting their borrowing would require them to
decrease the size of their portfolios -- and hence the risk
to the economy of a blow-up. Meanwhile, their regular
business of securitizing mortgages and selling them would be
unaffected. It is their repurchase of those mortgages with
subsidized credit that needs to be limited.

The Bush Administration has been
forceful in calling for Congress to reform how Fannie and
Freddie are regulated and run. But if it wants its effort to
succeed, it is going to have to show Fan and Fred and their
friends on the Hill that Treasury will act if Congress
doesn't..

Banking Fraud Whistleblower: Overcharging for
Student LoansA former U.S. Education Department
researcher climbed out of the shadows Monday and identified
himself as the whistle blower behind
revelations in 2004 that some
providers of student loans were taking advantage of a loophole
in federal law that allowed them to continue to make loans for
which they were guaranteed an interest rate return of 9.5
percent. At a news event Monday at the New America Foundation,
Jon H. Oberg, a former chief fiscal officer for the State of
Nebraska, aide to former Sen. J. James Exon (R-Neb.), and staff
member at the Institute of Education Sciences, said he had done
research
on the practicebefore his
superiors at the department reassigned him; he continued the
work on his own time, providing information to Congress and to
the department’s inspector general. The event came as the
inspector general prepares to release an audit that is expected
to show that Nelnet, a Nebraska-based lender, received many
millions of dollars in
overpayments of federal funds,
charges that Nelnet disputes.Inside Higher Ed, September 19, 2006 ---
http://www.insidehighered.com/news/2006/09/19/qt

If you have high blood pressure,
you may be at risk for heart disease. And given that an
estimated 65 million Americans have hypertension, it's not
surprising that drugs to treat it are among the most
prescribed medicines in the world. But why stop at
prescribing drugs to people whose readings are 140/90 or
higher, the standard definition of high blood pressure? In
the Apr. 20 issue of The New England Journal of Medicine, a
research team reported on "prehypertension," the condition
of being in danger of developing hypertension.

Prehypertension was first
identified in 2003, and some studies claim as many as 50
million U.S. adults have the condition, defined as blood
pressure readings from 120/80 to 139/89. This risk of being
at risk can be modified with diet and exercise, but the NEJM
study reports that it can also be treated with Atacand, a
drug from AstraZeneca Pharmaceuticals PLC (AZN ).

To a growing chorus of physicians
and health-care specialists, the very idea of treating the
risk of a risk is wrong. They have labeled the phenomenon
"disease-mongering," defined as the corporate-sponsored
creation or exaggeration of maladies for the purpose of
selling more drugs. Prehypertension "is a classic case of a
risk factor being turned into the disease," says Dr. Steven
Woloshin of the Veterans Affairs Outcomes Group in White
River Junction, Vt. "If you make a cut-off for blood
pressure that's close to the normal range, then just about
everyone can be diagnosed." An AstraZeneca spokesman
responds that the trial was considered important enough to
be published in the prestigious NEJM. "I think that speaks
for itself."

DEMAND FOR A QUICK FIX According to
critics, disease-mongering is on the rise. It starts when a
drug is developed for some once-rare condition. Then heavily
promoted disease-awareness campaigns kick into gear, leading
to increasing numbers of diagnoses and prescriptions. The
list of suspects includes restless legs syndrome, social
anxiety disorder, premenstrual dystrophic disorder,
irritable bowel syndrome, female sexual dysfunction, and
more. "Of course, some people have these diseases very
seriously," says Dr. Robert L. Klitzman, a psychiatrist and
bioethicist at Columbia University. "The problem is that
mild cases are being made to seem more serious than they
are."

The other problem, say the
anti-disease-mongerers, is that the vagaries of everyday
life, such as sadness, shyness, forgetfulness, and the
occasional upset stomach, are being turned into medical
conditions. Before Pfizer Inc.'s (PFE ) Viagra was
introduced, erectile dysfunction was a medical problem only
when associated with an underlying biological cause, such as
diabetes or prostate cancer. Now, Pfizer's Web site claims
that half of all men over 40 have problems getting or
maintaining an erection. Social anxiety disorder, defined as
severe shyness, was rarely seen until GlaxoSmithKline PLC's
(GSK ) Paxil was approved to treat it. A disease-awareness
campaign by Glaxo in the late 1990s, with the tag line
"imagine being allergic to people," was quickly followed by
rising prevalence estimates.

Disease promotion is not just the
purview of drug companies. "Doctors should set more
boundaries," asserts Dr. David Henry, a pharmacology
professor at the University of Newcastle in Australia and a
leading critic of disease-mongering. Then there are patients
seeking a quick fix for conditions that might better be
treated through lifestyle changes. "Drug companies are
playing off the desire we all have to get rid of things that
bother us," says Klitzman. But ridding oneself of bothersome
symptoms without changing the behaviors that contribute to
them can mean taking a pill every day for years, a
proposition that is both risky and costly.

YOUNGER AND YOUNGER Also of concern
are efforts to expand the definition of serious diseases to
cover more and more people. Loosened criteria for bipolar
disorder, a dire psychological disease once thought to
affect only 0.1% of the population, have led some experts to
claim prevalence rates of anywhere from 5% to 10%. Dr. David
Healy of Cardiff University in Wales says the higher
estimates are based on ill-defined surveys that followed the
introduction in the mid-1990s of mood stabilizer drugs,
promising relief even for people with mild emotional swings.
In the U.S., children as young as age 2 are being diagnosed
as bipolar even though, in the classic definition of the
illness, symptoms don't usually show up until the teens.
"These young kids are started on two or three medicines when
there isn't even any evidence that any of them work in
children," says Dr. Jon McClellan at the University of
Washington in Seattle.

Disease-mongering isn't new. The
term was coined by Lynn Payer in her 1994 book
Disease-Mongers: How Doctors, Drug Companies, and Insurers
are Making You Feel Sick. But the advent of
direct-to-consumer advertising in the U.S. in 1999 fanned
the trend, say drug industry critics. Their complaints
reached a critical mass this spring. The April issue of the
journal PLoS Medicine ran 11 articles on disease-mongering
to coincide with the first conference devoted to the topic,
held Apr. 11-13 in Newcastle.

Drugmakers say they're only trying
to educate patients who are struggling with serious
illnesses. "We realize that not every medicine is for every
person," says a spokeswoman for Glaxo, which makes drugs for
restless legs syndrome, social anxiety disorder, and other
diagnoses that are under fire. "The labels contain important
information about whether it's appropriate, and we're
confident that doctors consulting with patients will assess
their health-care issues and the risks and rewards and make
an appropriate decision."

The skeptics aren't convinced that
doctors will be so discriminating, in part because many get
their information about disease treatment from the drug
industry. Pharmaceutical companies routinely subsidize
continuing medical education courses for doctors. They fund
research for diseases that then gets published in medical
journals, and they underwrite patient advocate groups, which
in turn promote the underwriter's drugs on their Web sites.
Witness the Child & Adolescent Bipolar Foundation: It lists
four pharmaceutical companies as major donors, including Eli
Lilly & Co. and Janssen LP, makers of leading mood
stabilizers.

All these factors come into play
with restless legs syndrome, a case history detailed in PLoS
Medicine. Defined as the urge to constantly move one's legs,
the condition can be truly disruptive for people with severe
symptoms, but such severity is considered rare. That didn't
stop GlaxoSmithKline from launching a disease awareness
campaign in 2003. The company kicked off the blitz with a
press release stating that a "new survey reveals a common
yet underrecognized disorder -- restless legs syndrome -- is
keeping Americans awake at night." News articles
proliferated, most stating that the condition affects up to
10% of adults in the U.S., based on the study Glaxo
promoted.

In 2005, Glaxo's Requip, a
treatment for Parkinson's disease, was approved for restless
legs. At the same time the Restless Legs Syndrome
Foundation, which receives funding from Glaxo, issued a
press release about "a new national survey that shows [the]
syndrome is largely underrecognized and poorly understood."
A Glaxo spokeswoman says that most Requip prescriptions are
written for Parkinson's.

The VA's Dr. Woloshin grants that
some people are helped by Requip, Paxil, and Viagra. But he
worries that overtreatment drains money from research into
more serious illnesses. "None of these companies is coming
up with a cure for TB," he notes. That's a disease no one is
trying to monger.

Native Americans Are Suing for Billions of Dollars for
Accounting Fraud and Mismanagement

What is ground zero for an
accounting that will take seven years and cost $335 million
owes its existence to a bitter class-action lawsuit brought
against the Interior Department a decade ago. Still, it's
only a short version of the historical accounting that
Indians demanded but no longer want, because they do not
think it can be done properly.

The Indians say the government
mismanaged a trust in their names for 120 years and now owes
them tens of billions of dollars.

The dispute dates to 1887, when
Congress made the Interior Department the trustee for 145
million acres of Indian lands. Indians were supposed to
benefit, but the government gave most of the land to white
settlers.

Today, the department manages 10
million acres of trust land for individual Indians and 46
million acres for tribes. In 1996, the Indians sued to
reconcile their historical accounts. The Indians, and
Congress, demanded an audit. The Indians may be owed a
century's worth of grazing rents, oil and gas royalties and
timber sales from the land, plus interest.

Both the Indians and the Interior
Department agree $13 billion was collected between 1909 and
2001.

The Indians had claimed the unpaid
interest could be more than $150 billion, but have offered
to drop the whole thing if the government coughs up $27.5
billion. They would spread the money among individual Indian
accountholders, about one-fifth of the 2.5 million Indians
now living in the U.S., mainly in the West.

No way, the Bush administration
replied, saying the government all along has forwarded most
of the rents and royalties to tribes and individual Indians.

"It could be just $30 million
that's owed to the Indians," said Ross Swimmer, the
department's special trustee for Indians. He also is a
member of Oklahoma's Cherokee Nation.

During a tour of the Kansas cave,
Swimmer and other department officials were eager to show
that many more Indian records exist than people realize.
They also wanted to demonstrate their ability to check the
accuracy of financial transactions with Indians.

"They're finally going to get their
accounting," Swimmer said. "For once we've gotten something
right for the Indians."

In an irony befitting an "Alice's
Adventures in Wonderland" legal war, the government is
relying on the Indian-demanded accounting - actually, it's a
statistical sampling - to come up with figures that Indians
claim low-ball what they are owed.

"It's a number in the m's, not the
b's," said Fritz Scheuren, who oversees the department's
sampling. Scheuren was president of the American Statistical
Association last year.

The Indians who sued say now that
too many records have been destroyed to come up with an
accurate figure. Before 1990, the Treasury Department
routinely destroyed the Indian trust's canceled checks, and
court documents attest to numerous destroyed records.

"The documents that the government
has preserved are a fraction of those that have been lost
and destroyed," said Dennis Gingold, a lawyer for the
Indians. "Massive hard copy and electronic destruction ...
make the accounting legally and factually impossible."

The Indians' biggest ally is U.S.
District Judge Royce Lamberth, a former Reagan
administration official whose strongly worded rulings
condemn the Interior Department.

After nine years presiding over the
case, Lamberth concluded last July that the agency is a
"pathetic outpost" that has bungled its fiduciary duty.

Continued in article

Investors in Hedge Funds Do So at Their Own Peril

Hedge Funds Are Growing: Is This Good or Bad?When the ratings agencies downgraded General
Motors debt to junk status in early May, a chill shot through the $1
trillion hedge fund industry. How many of these secretive investment
pools for the rich and sophisticated would be caught on the wrong side
of a GM bond bet? In the end, the GM bond bomb was a dud. Hedge funds
were not as exposed as many had thought. But the scare did help fuel the
growing debate about hedge funds. Are they a benefit to the financial
markets, or a menace? Should they be allowed to continue operating in
their free-wheeling style, or should they be reined in by new
requirements, such as a move to make them register as investment
advisors with the Securities and Exchange Commission?
"Hedge Funds Are Growing: Is This Good or Bad?" Knowledge@wharton,
June 2005 ---
http://knowledge.wharton.upenn.edu/index.cfm?fa=viewArticle&id=1225

A federal appeals court ruled
yesterday that the Securities and Exchange Commission lacks
the authority to regulate hedge funds, dealing a possibly
fatal blow to the commission's efforts to oversee a rapidly
growing industry that now has $1.1 trillion in assets.

A three-judge panel of the United
States Court of Appeals for the District of Columbia Circuit
ruled unanimously that the commission exceeded its power by
treating investors in a hedge fund as "clients" of the fund
manager. The commission has authority over any manager with
at least 15 clients, and it used that to require hedge fund
managers to register.

The ruling, unless overturned on
appeal, means that Congressional action would be required to
grant the S.E.C. the authority to force hedge fund managers
to register, or for the commission to impose any other rules
on such funds.

The ruling does not leave such
funds totally above the law since they are treated like any
other investor in determining whether they violated
securities laws. As a result, the decision will not affect
an S.E.C. investigation into possible insider trading by a
major hedge fund manager, Pequot Capital Management, which
was disclosed in a New York Times article yesterday.

Christopher Cox, who became S.E.C.
chairman after the rule was adopted, said the commission
would review the issue, but stopped short of indicating that
it would continue to seek authority over hedge funds.

"The S.E.C. takes seriously its
responsibility to make rules in accordance with our
governing laws," Mr. Cox said in a statement. "The court's
finding, that despite the commission's investor protection
objective its rule is arbitrary and in violation of law,
requires that going forward we re-evaluate the agency's
approach to hedge fund activity."

He said the commission would "use
the court's decision as a spur to improvement in both our
rule making process and the effectiveness of our programs to
protect investors, maintain fair and orderly markets, and
promote capital formation."

As hedge funds have grown, and as
some have collapsed amid fraud or because they took
excessive risks, pressures to regulate them have grown. But
fund managers have protested that the vast majority have
acted responsibly and should not be subjected to what James
C. McCarroll, a lawyer with Reed Smith, a New York law firm,
said yesterday were "regulatory overlays and burdens"
approaching those faced by mutual funds.

The S.E.C. rule, adopted in
December 2004 on a 3-to-2 vote, called for fund managers
with more than $30 million in assets and at least 15
investors to register with the commission. Nearly 1,000
managers did so by the deadline of Feb. 1, 2006.

The S.E.C. rule exempted funds that
imposed two-year lockups on investors' money, meaning the
money could not be withdrawn for at least that long, leading
a number of funds to impose such lockups. Some may choose to
remove or ease those rules now.

Hedge funds, as the appeals court
opinion written by Judge Arthur R. Randolph noted, "are
notoriously difficult to define." But they generally are
open only to wealthy investors and charge fees based on a
percentage of the assets under management plus a portion of
the profits.

The growth of hedge funds has made
some managers incredibly wealthy, with incomes dwarfing even
those of high-paid corporate chief executives. Alpha, a
publication of Institutional Investor, reported that two
hedge fund managers earned more than $1 billion each in
2005.

The pressure for more oversight of
hedge funds grew after one fund, Long-Term Capital
Management, almost collapsed in 1998. The Federal Reserve,
fearful that such a collapse could cause systemic risk,
encouraged Wall Street firms to mount a rescue, which they
did.

The emergence of activist hedge
funds, which sometimes act in concert with each other and
can become the largest shareholders of some companies, has
also increased calls for regulation, both here and in
Europe. A German politician called such funds "locusts" that
plundered German companies and then fired German workers.
Some European governments have pushed for international
regulation of such funds.

The decision to push for S.E.C.
registration was made by Mr. Cox's immediate predecessor,
William H. Donaldson. Mr. Donaldson argued that the funds
had grown so large they could cause systemic risk to the
financial markets, and that a gradual process of "retailization,"
through such trends as "fund of funds" that allow relatively
small investments, had made it more important for regulators
to have at least some knowledge of what was going on in the
funds.

Warning to retirees: Beware of your familiesFinancial swindles are one of the
fastest-growing forms of elder abuse. By some estimates, as many
as five million senior citizens are victimized each year, says
Sara Aravanis, director of the nonprofit National Center on
Elder Abuse, which provides information to federal and state
policy makers. Because of the problem's spread, "many states
have laws authorizing financial institutions to report
suspicions of elderly abuse," says Bruce Jay Baker, general
counsel for the Illinois Bankers Association. Earlier this
summer, the Securities and Exchange Commission hosted a Seniors
Summit to highlight the issue, with SEC Chairman Christopher Cox
noting that protecting seniors' pocketbooks "is one of the most
important issues of our time."
Jeff D. Opdyke, "Intimate Betrayal: When the Elderly Are Robbed
by Their Family Members," The Wall Street Journal, August
30, 2006; Page D1 ---
http://online.wsj.com/article/SB115689331870748918.html?mod=todays_us_personal_journal

A Little Like Dirty Pooling AccountingTyco Undervalues Acquired Assets and Overvalues Acquired Liabilities:
Tyco International Ltd. said Monday it has agreed to
pay the Securities and Exchange Commission $50 million to settle charges related
to allegations of accounting fraud by the high-tech conglomerate's prior
management. The regulatory agency had accused Tyco of inflating operating
earnings, undervaluing acquired assets, overvaluing acquired liabilities and
using improper accounting rules, company spokeswoman Sheri Woodruff said. 'The
accounting practices violated federal securities laws,'' she said. "Tyco to Pay S.E.C. $50 Million on Accounting Charges,"
The New York Times,
April 17, 2006 ---
http://www.nytimes.com/aponline/business/AP-Tyco-SEC-Fine.html?_r=1&oref=slogin

April 17, 2006 reply from Saeed Roohani

Bob,

Assuming improper accounting
practices by Tyco negatively impacted investors and
creditors in the capital markets, why SEC gets the $50 M?
Shouldn't SEC give at least some of it back to the people
potentially hurt by such practices? Or damage to investors
should only come from auditors' pocket?

Saeed Roohani

April 18, 2006 reply from Bob Jensen

Hi Saeed,

In a case like this it is difficult to identify
particular victims and the extent of the damage of this one
small set of accounting misdeeds in the complex and
interactive multivariate world of information.

The damage is also highly dispersed even if you confine
the scope to just existing shareholders in Tyco at the
particular time of the financial reports.

One has to look at motives. I'm guessing that one motive
was to provide overstated future ROIs from acquisitions in
order to justify the huge compensation packages that the CEO
(Kozlowski) and the CFO (Schwarz) were requesting from
Tyco's Board of Directors for superior acquisition
performance. Suppose that they got $125 million extra in
compensation. The amount of damage for to each shareholder
for each share of stock is rather minor since there were so
many shares outstanding.

Also, in spite of the illegal accounting, Kozlowski's
acquisitions were and still are darn profitable for Tyco. I
have a close friend (and neighbor) in New Hampshire, a
former NH State Trooper, who became Koslowski's personal
body guard. To this day my friend, Jack, swears that
Kozlowski did a great job for Tyco in spite of possibly
"stealing" some of Tyco's money. Many shareholders wish
Kozlowski was still in command even if he did steal a small
portion of the huge amount he made for Tyco. He had a skill
at negotiating some great acquisition deals in spite of
trying to take a bit more credit for the future ROIs than
was justified under purchase accounting instead of virtual
pooling accounting.

I actually think Dennis Kozlowski was simply trying to
get a bit larger commission (than authorized by the Board)
for some of his good acquisition deals.

Would you rather have a smart crook or an unimaginative
bean counter managing your company? (Just kidding)

On April 17, 2006, the Securities
and Exchange Commission issued Litigation Release No. 19657,
which states that the SEC and Tyco have settled terms over
this fraud. In its civil complaint, the SEC alleges that
Tyco undervalued assets and overvalued liabilities acquired
in business combinations, inflated operating income and cash
flows from operating activities, and bribed foreign
officials in Brazil. The SEC also contends that Tyco covered
up these activities with false and misleading financial
reports. In the usual fashion of these decrees, Tyco neither
admits nor denies the charges; nevertheless, it consents to
the judgment. In this case, Tyco must pay a $50 million
penalty.

But, just a minute! Who is really
paying this $50 million fine? It's not management, neither
Kozlowski nor Schwartz (the SEC continues its investigation
of them, and they may receive additional fines), nor Tyco's
present management team. The board of directors is not
paying the fine either. Given the firm itself is paying this
ticket, it implies that the real payers are the investors of
Tyco, who in effect must cough up $50,000,000. So this
raises the question -- why should the investors get ripped
off twice?

Let's go back to basics: civil
penalties and criminal sentences serve two purposes in our
society. First, they satisfy, however partially, our
collective sense of justice. Kozlowski and Schwartz
defrauded many investors, and these aggrieved investors seek
justice, but they seek justice against the perpetrators of
the conspirators, not the victims. Not themselves. Second,
society issues civil penalties and criminal sentences to
deter future crimes. The idea is that if the disincentives
are sufficiently obnoxious and if the probably of
enforcement is sufficiently high, then future managers are
less likely to follow suit with their own crimes against
investors. In this case too, the argument is persuasive as
long as the courts levy fines and punishment against the
malefactors and not against the victims.

The SEC has for a long time engaged
in these civil judgments against firms that have experienced
accounting and securities fraud. It would do well for the
SEC to re-examine this policy, realize that its effects are
pernicious and counterproductive, and then repeal the
strategy. It is silly for the investors to suffer for the
wrongdoing by corporate thieves masquerading as managers.

As an aside, the reader may
remember the infamous committee headed by David Boies, on
behalf of Tyco's board of directors, to examine the Tyco
situation and determine whether Tyco had engaged in an
accounting scam. Tyco issued this report in an 8-K filed on
December 30, 2002. That committee kept its eyes closed and
found that "there was no significant or systemic fraud." I
wonder what excuse David Boies or the other members of the
committee could provide today for their wanting analysis.

If the SEC really desires to deter
future accounting frauds, it must align its punishment with
the scoundrels who carry out these misdeeds. The SEC also
must enforce the securities laws to the fullest extent
possible. If today's managers see other managers hauled off
to prison or paying huge fines, they will be less apt to
steal from and cheat investors. If today's managers see the
corporation fined and thus feel little or no impact
themselves, well, the firm becomes one's personal piggy
bank.

The payment -- the largest
market-timing settlement involving a single firm -- ends
civil and criminal probes and allegations by the Department
of Justice, the Securities and Exchange Commission and
several other regulators including New York Attorney General
Eliot Spitzer.

Prudential Equity Group, a
subsidiary of Prudential Financial (PRU) admitted criminal
wrongdoing as part of its agreement with the Justice
Department. Prudential Equity Group was formerly known as
Prudential Securities.

Prudential will pay $270 million to
victims of the fraud, a $300 million criminal penalty to the
U.S. government, a $25 million fine to the U.S. Postal
Inspection Service and a $5 million civil penalty to the
state of Massachusetts, according to the Justice Department.

"Prudential to Pay Fine in Trading," by Landen Thomas Jr.,
The New York Times, August 29, 2006 ---
Click Here

Prudential Financial, the life
insurance company, agreed yesterday to pay with
federal and state regulators that one of its units engaged
in inappropriate mutual fund trading.

The payment, the second-largest
levied against a financial institution over the practice,
may bring to a close a three-year investigation into the
improper trading of mutual funds that has ensnared some of
the largest names on Wall Street and the mutual fund
industry.

The settlement with the Justice
Department, which covers trades totaling more than $2.5
billion made from 1999 to 2000, is also the first in the
market timing scandal in which an institution has admitted
to criminal wrongdoing.

Such a concession by Prudential,
part of a deferred prosecution agreement that will last five
years, underscores the extent to which the improper trading
practices were not only widespread at Prudential Securities,
but also condoned by its top executives, despite repeated
complaints from the mutual fund companies.

Morgan Stanley agreed to pay $15
million to settle a civil lawsuit with the Securities and
Exchange Commission over failure to produce tens of
thousands of emails during probes of conflicts of interest
among Wall Street analysts and other issues between late
2000 and mid-2005.

New York-based Morgan Stanley
neither admitted nor denied the SEC's charges, which have
been previously reported by The Wall Street Journal. The SEC
said $5 million of the fine will go to the New York Stock
Exchange and the NASD, formerly the National Association of
Securities Dealers, to settle separate related proceedings.

A Morgan spokesman said the firm is
glad the matter is behind it. The firm continues to
negotiate with regulators about failure to produce emails in
probes of its retail brokerage unit.

It is appealing a much larger
headache: Last May the firm was ordered to pay billionaire
financier Ronald Perelman $1.45 billion over a lawsuit that,
in the end, focused largely on the firm's inability to
produce documents. In that case, the judge concluded that in
many instances Morgan Stanley's actions "were done
knowingly, deliberately and in bad faith." The firm is
appealing the verdict. Oral arguments for the appeal are
scheduled for June 28 in state court in West Palm Beach,
Fla.

According to the SEC, Morgan
Stanley failed to "diligently search" for backup tapes
containing emails until 2005 and couldn't produce some
emails because the company overwrote backup tapes. In
addition, the SEC said Morgan made "numerous misstatements"
about its email retention. The SEC charged the company with
failing to provide records and documents in a timely manner,
as required by U.S. securities laws.

According to the SEC complaint, it
received an anonymous tip in the fall of 2004 that Morgan
Stanley had destroyed some electronic documents and failed
to produce others.

Morgan Stanley and nine other firms
agreed in 2003 to pay $1.4 billion as part of a so-called
global settlement over charges that they issued biased
research to win investment banking business.

The fine won't reopen the global
settlement, according to people familiar with the matter,
and isn't likely to help the hundreds of investors who
failed in their attempt to win damages against the firm, in
part because Morgan Stanley was unable to produce emails.

The SEC also said Morgan Stanley
was lax in searching for and delivering emails during its
investigations of Wall Street's distribution of hot initial
public offerings during the dot-com boom. Morgan Stanley
paid $40 million in 2005 to settle SEC allegations of
improper IPO allocation practices.

"Accountability Office Finds Itself Accused," by William J.
Broad, The New York Times, April 2, 2006 ---
Click Here

A senior Congressional investigator
has accused his agency of covering up a scientific fraud
among builders of a $26 billion system meant to shield the
nation from nuclear attack. The disputed weapon is the
centerpiece of the Bush administration's antimissile plan,
which is expected to cost more than $250 billion over the
next two decades.

The investigator, Subrata Ghoshroy
of the Government Accountability Office, led technical
analyses of a prototype warhead for the antimissile weapon
in an 18-month study, winning awards for his "great care"
and "tremendous skill and patience."

Mr. Ghoshroy now says his agency
ignored evidence that the two main contractors had doctored
data, skewed test results and made false statements in a
2002 report that credited the contractors with revealing the
warhead's failings to the government.

The agency strongly denied his
accusations, insisting that its antimissile report was
impartial and that it was right to exonerate the contractors
of a coverup.

The dispute is unusual. Rarely in
the 85-year history of the G.A.O., an investigative arm of
Congress with a reputation for nonpartisan accuracy, has a
dissenter emerged publicly from its ranks.

Continued in article

"'Pretexting' is common in business world," by Peter Svensson,
Yahoo News, September 13, 2006 ---
Click Here

Although the boardroom scandal at
Hewlett-Packard Co. made the practice more widely known,
buying phone records or other personal information obtained
by "pretext" calls appears to have been common in parts of
the business world. ADVERTISEMENT

In a letter to the House Energy and
Commerce committee, which was investigating the issue this
year, data broker PDJ Investigative Services described its
customers as "law offices, repossession companies, financial
institutions, collection agencies, bail enforcement
agencies, law enforcement agencies and various private
investigation and research companies."

"Those businesses have a common
need. That need is to be able to locate individuals, who do
not wish to be found," another data broker, Universal
Communications Co., wrote to the committee.

For example, banks sought to find
debtors who defaulted on loan payments, and car finance
companies traced people who stopped paying their auto loans
and disappeared, Universal Communications said.

PDJ sold records of local and
long-distance calls as well as non-published phone numbers
and home addresses, according to an old price list submitted
to the House committee.

In its letter, PDJ said it did not
perform pretext calls itself, but paid independent vendors
for the information, or searched public databases and the
Internet.

Robert Douglas, a privacy
consultant in Colorado who closely follows pretexting and
other investigatory techniques, said such independent
vendors use sophisticated methods to fool customer service
representatives into giving out information.

However, the attention given to
pretexting in the past two years — the HP scandal is just
the latest in a series of revelations — has made data
brokers restrict sales of certain kinds of information. Cell
phone companies, one of the major targets of pretexters,
also have fought back by launching lawsuits.

Pretexting has long been a tactic
used by private investigators and others to obtain personal
information and records about people. Also known as "social
engineering" in the hacker realm, it involves using ploys to
obtain data and documents.

The ploys range from the creative
to the straightforward. In the Hewlett-Packard case, outside
investigators hired by the company simply posed as the
victims -- HP board members and journalists -- to obtain
their phone records from phone companies.

On the more inventive side, Verizon
Wireless last year accused online data brokers of making
hundreds of thousandsof calls to
the company's customer service lines posing as fellow
Verizon employees with the company's "special needs group,"
a nonexistent department. The callers obtained customer
account information by claiming to be making the requests on
behalf of voice-impaired customers.

Against that kind of initiative, it
seems like there's little an ordinary consumer, Silicon
Valley director or tech journalist can do. But there are
some options.

Buy a TracFone.
There's a reason law enforcement agencies hate disposable
cell phones: They don't keep a call detail record. This
solution isn't convenient or desirable for everyone, but if
you're concerned about your phone records being obtained
fraudulently by third parties, or subpoenaed by authorities,
a prepaid phone service offers the best privacy.

Prepaid phones range in cost from
$20 to $80 and usually come with a set number of minutes to
start, which can be augmented by purchasing prepaid calling
cards for $20 to $100.

Naturally, your prepaid phone
number will still appear on the calling records of people
you call, and who call you. But because the prepaid services
don't require you to provide your name, the phone number
alone will be of limited use to snoops. Be sure to pay for
your phone and prepaid phone cards with cash, and only add
minutes through the phone's built-in interface -- don't use
the service provider's website, which could track your IP
address.

Don't Tell on Yourself.
A little bit of information can help scammers get a lot
more; in the HP case, the investigators used the last four
digits of their targets' Social Security numbers to
authenticate themselves to the phone companies they tricked.

That's why the FTC advises
consumers to guard personal information such as Social
Security numbers, birth dates, account numbers and passwords
to prevent someone from using the information to impersonate
you and obtain your records. To that end, don't provide
personal information over the phone, in an e-mail or in
person to anyone unless you initiated the contact. Even
then, be guarded about providing legitimate agencies with
more information than they need.

Choose Your Own Passwords.
Companies love using Social Security numbers and dates of
birth as authentication, despite the fact that neither bit
of info is very private. Insist that your health insurance
provider and phone companies allow you to use a
customer-designated password or a unique identifying number
instead. Don't let them bully you into using your Social
Security number, and use different passwords for different
accounts.

Shred It.
Cross-shred documents that contain personal information
before discarding them, and do not leave such documents
lying around where maintenance workers and visitors can
see them.

Leave
Your Vital Stats Offline. Do not publish your
birth date or other personally identifiable information
about you or your children on your MySpace or Facebook
page. It's obvious, but worth repeating.

Don't Pay Bills Online.
Yes, we know it's convenient, and we know that banks and
utility companies pressure customers to establish online
billing accounts to eliminate the cost of paper records.
But resist the urge. Online accounts put you at risk no
matter what businesses say.

Websites are seldom as secure
as companies insist they are. Even when they are secure,
smart people like you can sometimes still get tricked
into using a spoof site that looks exactly like the real
thing, or wind up with malicious software that records
every keystroke on their computer and passes the info on
to a hacker.

While we're on the subject,
don't file your taxes online either. Yes, it's
convenient. No, it's not secure. It's possible that
hackers can obtain the same information by hacking a
vulnerable data server or stealing an employee laptop,
but that's out of your control. How you file is in your
control.

See If You've Already
Been Hit. In an internal investigation of
pretexted records, AT&T identified about 2,500 of its
customers as possible victims. And that's just one phone
company. To find out if you've already been a victim of
phone record pretexting, contact your telephone company
in writing to determine if anyone has requested your
records. If you've pissed off HP recently, do it today.

Lobby for Change.
Pressure your congressional representatives and the FCC
into forcing phone companies to improve the security of
customer records. The Electronic Privacy Information
Center offers a number of
suggestionsfor boosting
security, include forcing carriers to maintain an audit
trail to track whenever a customer's records are
accessed, and by whom.

EPIC also suggests that phone
companies be required to notify customers when someone
has breached their records. Phone companies, in recent
lawsuits against pretexters, have admitted being duped
hundreds of thousands of times into handing over
customer records to unauthorized people. Yet current
breach-notification laws don't cover these records,
since they're not considered personally identifiable
information.

Additionally, phone companies
should be forced to notify customers of changes to their
account, such as when someone establishes a new online
billing account for their phone number. Many banks
already send written verification to customers by mail
if the customer or someone else requests a change to
their account password or contact information. Had AT&T
done this, HP board member Tom Perkins and others caught
in the HP investigation would have been alerted back in
January that someone was trying to access their records
online.

In the final years of Saddam
Hussein’s dictatorship, he earned more than $1.8 billion in
kickbacks as a result of the United Nations’ oil-for-food
program. He brought in billions more by smuggling oil out to
Jordan and Syria. Across the country, graft was a
precondition of doing business. Saddam’s exit and the
arrival of free-market reforms were supposed to change all
this; Deputy Prime Minister Ahmad Chalabi spoke of an era of
“transparency, accountability, and value for money.” Yet
corruption remains ubiquitous. In the past couple of years,
more than a billion dollars has gone missing from Iraq’s
Defense Ministry. Hundreds of millions are being skimmed off
the country’s oil sales. Banks, utility companies, and
passport offices routinely require baksheesh to get things
done. Transparency International, in its latest survey of
perceived global corruption, labelled Iraq the most corrupt
country in the Middle East.

This is hardly surprising.
Corruption usually flourishes in the wake of an
authoritarian regime’s collapse. The fall of the Soviet
Union gave rise to an epidemic of graft in Russia and other
former Soviet republics. When it’s unclear who’s in charge,
rules become open to manipulation, and bureaucrats,
uncertain about their jobs, tend to put their own short-term
interests first. In Iraq, these problems have been
exacerbated by other factors. The intense competition to
control the nation’s oil reserves creates ample
opportunities for skimming—indeed, economies that depend
heavily on natural resources are generally more corrupt, as
are wartime economies.

Corruption may be ethically
unsavory, but, according to some economists, it may also be
economically beneficial. In a country where elaborate
bureaucracies make it hard to start companies, import or
export goods, or simply get a passport, bribes can cut
through red tape, serving as what’s called “speed money.”
Bribes can also motivate bureaucrats who would otherwise
shirk their duties; in the Russia of Peter the Great, for
instance, most officials received small salaries and made up
the difference with bribes. And corruption isn’t necessarily
an obstacle to economic growth. In the postwar years,
countries like South Korea and Indonesia were bastions of
cronyism and graft but saw their economies boom; today,
China and India are two of the world’s fastest-growing
economies, and both receive poor grades from Transparency
International. So perhaps Iraq’s Commission on Public
Integrity should simply accept that corruption provides the
grease to keep the wheels of commerce turning.

It would be comforting to think so.
And there are conditions under which bribes seem to work
well. When power is in the hands of an authoritarian
government that keeps bureaucrats under firm control, the
state is able to act like a smart monopolist: its employees
charge prices that are high but not too high, and are able
to deliver what they promise. So bribe-takers collect what
amounts to an unofficial tax and bribers get what they pay
for. In a country like Iraq, though, where the state is
weakened, corruption tends to be more anarchic and less
effective. Instead of monopolistic corruption—a single
bribe-taker representing the government—you get competitive
corruption: everyone has his hand out. A study of what it
took to open a business in Russia in 1991, for instance,
found that bribes had to be paid to local and national
officials, fire inspectors, the water department, and so on.
Apart from the sheer expense, in a situation like this it’s
unclear whether a bribe will have any effect. As a result,
people either decide against doing business in the first
place or are driven underground, into the so-called “shadow
economy.”

Furthermore, even if corruption can
be a useful means of bypassing inefficiencies in the short
term, in the long term it tends to create inefficiencies of
its own. Bribing, it turns out, doesn’t always speed things
up: in a vast study of twenty-four hundred companies in
fifty-eight countries, Daniel Kaufmann, of the World Bank,
and Shang-Jin Wei, of the I.M.F., found that the more a
company had to bribe, the more time it spent tied up in
negotiations with bureaucrats. Graft also encourages
government officials to keep complicated procedures in
place, since that insures that the bribes keep coming. So
corruption isn’t just a product of bad institutions and
policies; it also helps cause them. Almost every study done
in the past ten years has found that, on the whole, corrupt
countries grow more slowly and have a much harder time
attracting foreign investment. And work by Wei suggests that
even the exceptions, like China, have probably succeeded
more in spite of corruption than because of it.

Fighting corruption, then, is not
only an ethical issue but an economic one. The problem is
that most anti-corruption campaigns fail. In part, that’s
because the task is absurdly hard. But it may also be
because anti-corruption campaigns tend to target low-level
corruption rather than attacking what economists call “grand
corruption.” Relying on a variant of the “broken windows”
theory, these campaigns have assumed that cleaning up
day-to-day graft will make all corruption less acceptable.
Yet a study by the economist Eric Uslaner shows that it’s
high-level graft that really shapes citizens’ perceptions of
how corrupt their society is. Corruption fighters in Iraq,
in other words, should ignore the greedy bureaucrats at the
electric company and concentrate, instead, on holding
high-level officials accountable for the billion dollars
missing from the Defense Ministry. Granted, this is probably
an unrealistic goal. But in Iraq today what isn’t?

Deep in the weeds of Turtle Bay,
U.S. Ambassador John Bolton has been hacking a path toward
United Nations reform -- an effort about as fraught as
Marlow's quest for Captain Kurtz in Conrad's "Heart of
Darkness," and no less horrifying.

But here's the good news: Two
reports, released late last month by Congress's Government
Accountability Office, are shedding light on how the U.N.
mismanages its procurement and auditing functions. U.N.
bureaucrats may be trying to downplay the findings, but the
rest of us should pay attention.

Consider procurement. Thanks to
various Oil for Food investigations, we learned that
Alexander Yakovlev, a middle-ranking U.N. procurement
officer, siphoned $1 million in bribes from $79 million
worth of U.N. contract work. Mr. Yakovlev pleaded guilty in
a U.S. court to three counts of fraud and money laundering
last August.

But that's just the beginning. In
January, Secretary General Kofi Annan placed eight top
procurement officials on special leave, pending
investigations by the U.N. and U.S. One of these officials
is Sanjaya Bahel, former head of the U.N.'s Commercial
Activities Services as well as its Post Office. Among other
charges, Mr. Bahel, who also worked for the Indian Defense
Ministry while at the U.N., is alleged to have improperly
steered U.N. peacekeeping contracts to several Indian
companies, one of them government-owned.

Also in January, the U.N.'s Office
of Internal Oversight Services conducted an audit of U.N.
peacekeeping procurement, the value of which has quadrupled
over the last decade to $1.6 billion. The Office found that
$110 million worth of expenditures had "insufficient"
justification; another $61 million bypassed U.N. procedures;
$82 million had been lost to various kinds of mismanagement;
close to $50 million in contracts had shown indications of
"bid rigging"; and $7 million were squandered through
overpayment. That's a total of more than $300 million.

Senior U.N. management has
responded with denial: "Not a penny was lost from the
organization," insists Deputy Secretary General Mark Malloch
Brown. But that point is hard to credit in light of the
GAO's findings. Among them: The U.N. has set no training
requirements for its procurement staff; has no independent
process to address vendor protests; and has no internal
mechanisms either to monitor procurement or identify areas
prone to fraud or mismanagement.

On auditing, too, corruption starts
at the top: Along with Mr. Yakovlev, the other U.N. official
to have been recently indicted in the U.S. for bribery is
Vladimir Kuznetsov, formerly head of the U.N.'s budget
oversight committee. In theory, the oversight office is
supposed to be an independent agency. In practice, it relies
for its funding on the very U.N. agencies it is supposed to
monitor and investigate.

The result, the GAO notes, is that
"by denying OIOS [oversight office] funding, U.N. entities
could avoid OIOS audits or investigations." A case in point
was Benon Sevan's refusal to fund an audit of the $100
billion Oil for Food program, which he administered and from
which he is alleged to have personally profited. That
behavior is only symptomatic of ongoing U.N. practices:
Oversight officials tell GAO investigators that they have
"no authority to enforce payment for services rendered and
there is no appeal process, no supporting administrative
structure, and no adverse impact on an agency that does not
pay or pays only a portion of the bill."

There's more of this, and we urge
readers to see for themselves at www.gao.gov. Meantime, it
would help if the Bush Administration paid more than lip
service to holding the world body to account, not least by
holding up its U.N. dues until meaningful reform is
achieved. Until that happens, the world body will continue
to breed corruption without remedy or consequence, in plain
sight.

A former U.S. Army Reserve officer
from Spotsylvania County admitted yesterday that he steered
millions of dollars in Iraq-reconstruction contracts in
trade for jewelry, computers, cigars and sexual favors.

Hopfengardner served as a special
adviser to the U.S.-led occupation, recommending funding for
projects on law-enforcement facilities in Iraq.

He admitted conspiring with Philip
H. Bloom, a U.S. citizen with businesses in Romania, Robert
J. Stein Jr., a former Defense Department contract official,
and others to create a corrupt bidding process that included
the theft of $2 million in reconstruction money.

Hopfengardner is the first military
officer to plead guilty in the conspiracy. Bloom and Stein
already have pleaded guilty to charges stemming from the
scheme.

Hopfengardner's role was to
recommend that the Coalition Provisional Authority fund
projects to demolish the Ba'ath Party headquarters, rebuild
a police academy and construct various other facilities.

Bloom, who controlled companies in
Iraq and Romania, bid on projects using dummy corporations.
Stein ensured that one of the firms was awarded the
contract, according to court documents.

The businessman allegedly showered
Hopfengardner and Stein with cash, cars, premium airline
seats, jewelry, alcohol and even sexual favors from women at
his Baghdad villa.

"A lieutenant colonel in the U.S.
Army today admits to a disturbing abuse of his position, in
scheming with others to defraud the government for their own
personal and financial gain," Assistant Attorney General
Alice S. Fisher said in a statement.

Court papers said Hopfengardner
demanded that Bloom pay for a white 2004 GMC Yukon Denali
with a sandstone interior. At Hopfengardner's request, Bloom
also allegedly paid the air fare for Hopfengardner and his
wife to travel from San Francisco to Fort Lauderdale, Fla.,
while he was on leave in January 2004.

E-mails that prosecutors made
public in April show that Bloom told his employees to spare
no expense in satisfying the officials who controlled
contracts in the CPA's regional office in Hillah, about 50
miles south of Baghdad.

As part of the plea agreement,
Hopfengardner surrendered a car, a Harley-Davidson
motorcycle, camera equipment, a Breitling watch valued at
$5,700 and a computer. He also agreed to forfeit $144,500,
prosecutors said.

Executives Are Betting On Yesterday's Horse Races

As an aside, once again this shows
that finance and accounting go hand in hand as Collins, Gong,
and Li are accounting professors!

Do managers
backdate options?

A U.S. government probe into
stock option grants for executives widened on
Tuesday with more technology companies being called
on to explain the way these grants are awarded.

The investigation focuses
on whether companies are giving executives backdated
options after a run-up in the stock. Backdated
securities are priced at a value before a rally,
which boosts their returns.

The
Securities and Exchange Commission (SEC) is
reportedly examining the timing of stock option
awards by corporations." (BTW this is included to
you can listen to it--has several professors
speaking on it.)

""The stock-option game is
supposed to confer the potential for profit, but
also some risk," said John Freeman, a professor of
business ethics at the University of South Carolina
Law School who was a special counsel to the SEC
during the 1970s. "When in essence the executives
are betting on yesterday's horse races, knowing the
outcome, there's no risk whatever.""

What does past academic
research have to say on this? Most of the evidence
suggests that backdating probably does occur.

For years there have been
papers showing that managers tend to announce bad news
prior to option grants and even time the grants prior to
price run ups (see Yermack 1997) it has only been more
recently that researchers have noticed that the price
appreciation was not merely due to firm specific factors
(which managers may be able to control and time) but
also market wide factors (i.e. the stock market goes up
after option grants).

Last year a paper by
Narayanan and Seyhunsuggested
that this may be the result of backdating the option
grants. More recently two papers by Collins, Gong, and
Li (a)
and (b)
find further evidence that
backdating is (or at least was) happening and that
unscheduled grant dates (where this can occur) tend to
be found more commonly at firms whose management has
relatively more control over their board of directors.Stay tuned!!

* A quick comment to any manager who may have done this:
Why bother? Why risk it all cheating for a few extra
dollars? (Indeed it reminds me of the Adelphia case
where the firm outsourced snow plowing to a Rigas owned
firm. It just doesn't seem worth it.)

*As an aside, once again this shows that finance and
accounting go hand in hand as Collins, Gong, and Li are
accounting professors!

It appears that thousands of CEOs were allowed by their
boards to bet on yesterday's horse raceIn theory, directors are supposed to
help keep wayward practices like options backdating in check at
most companies, but at Mercury it was the directors themselves —
who received a final seal of approval from the company’s
compensation committee — who kept the backdating ball rolling.
Now, as federal investigations of possible regulatory and
accounting violations related to options backdating have
expanded to include more than 80 companies. Mercury’s pay
practices — and the actions of the three outside directors on
its compensation and audit committees — have come under
scrutiny. In late June, the Securities and Exchange Commission
advised the three men that it was considering filing a civil
complaint against them in connection with dozens of manipulated
options grants.
Eric Dash, "Who Signed Off on Those Options?" The New York
Times, August 27, 2006 ---
http://www.nytimes.com/2006/08/27/business/yourmoney/27mercury.html

The California Public Employees'
Retirement System is demanding a conference call with the
compensation committee of the board of UnitedHealth Group
Inc. over its disclosure practices, and is threatening to
withhold votes for board directors seeking re-election.

In a letter sent to James A.
Johnson, chairman of the UnitedHealth board's compensation
committee, Calpers board President Rob Feckner demanded a
conference call ahead of Tuesday's UnitedHealth shareholders
meeting to discuss what he called "serious threats to the
credibility, governance and performance of UnitedHealth."
Specifically, the letter criticized the company's failure to
explain how it determined stock option grant dates for Chief
Executive William McGuire and a handful of other executives
in past years, and its "inconsistent" disclosure of its
option-granting program.

The move by Calpers increases the
scrutiny of the process by which Dr. McGuire received some
of the $1.6 billion in unrealized gains he holds in company
stock options. Calpers holds 6.55 million shares, or 0.5%,
of UnitedHealth's outstanding stock. The pension fund, known
for its strong stances on corporate governance, could spur
other investors to join in its criticism. The move also
increases pressure on UnitedHealth's board to more fully
explain its past option-award practices soon, even though
its board only launched a probe into them earlier this
month.

Continued in article

Which brings us to Congress, the villain of this tale that the rest of the
press corps wants to ignore. Executive greed is an easier story to sell, we
suppose. But the same Members of Congress who most deplore big CEO paydays are
the same ones who created the incentive for companies to overuse options as
compensation.

These columns have never joined the
media pack deploring executive pay, since wages are best
determined by directors and shareholders. But that doesn't
mean every pay practice is kosher, especially if it's done
on the sly. That's where the recent news over the
"backdating" of stock options is cause for some concern --
and for more aggressive director supervision.

CEO pay has been going up, in part
because the market is putting a premium on the skills
necessary to navigate today's legal and competitive
minefields. Some of the increases also flow from the greater
use of stock options, which came into their own in the 1990s
thanks in part to Congress (more on that below). Options are
supposed to align the interests of management with those of
shareholders, but they can also be abused.

This appears to be the case with
"backdating," which is the practice of moving the strike
date for option grants to ensure lower exercise prices and
thus a bigger payday. Companies grant options according to
shareholder-approved plans, most of which require a grant to
carry the stock price on the day it was awarded. If it turns
out the grant carries a different day's price, those who do
the "backdating" could be guilty of false disclosure and
securities fraud.

The number of companies doing this
isn't clear, though the SEC is investigating at least 20 and
prosecutors have launched criminal probes into a half-dozen.
In the least savory instances, executives may have been
trying to pull a fast one by altering option dates without
the approval of directors. Vitesse Semiconductor Corp.
recently fired three top managers, including its CEO,
because of what it called "issues related to the integrity
of documents relating to Vitesse's stock option grant
process." Never a good sign.

But some boards may also have been
asleep at the option switch. Affiliated Computer Services
recently announced it will take a charge against earnings of
as much as $40 million due to accounting problems related to
option grants. Why? Well, ACS explained that its board
compensation committee has typically approved grants over
the phone -- making them effective that day -- with official
written consent coming later. ACS says it believes this
practice was "permitted" under law, but shareholders might
ask why they are now getting stuck with the $40 million
surprise tab.

Then there's UnitedHealth Group CEO
William McGuire, who is being pilloried for his $1.8 billion
in unrealized option gains. The health insurer has said it
may have to restate three years of results due to a
"significant deficiency" in how it administered option
grants, which would suggest backdating.

But what especially caught investor
eyes was the news that the company's board had allowed Mr.
McGuire to choose his own grant dates. Directors may well
have meant this as an added perk for a CEO whose tenure has
seen a 50-fold rise in UnitedHealth's share price. Yet the
practice still looks like an abdication by the board, which
represents shareholders and is supposed to guard against
needless equity dilution.

Some companies have insisted that
their boards consciously pegged option grants to coincide
with relatively low stock prices. But this would seem to
contradict the alleged purpose of options, which is to give
management an incentive to raise the stock price and thus
the return to shareholders. Granting options at a very low
price amounts to additional guaranteed compensation, and
ought to be labeled as such.

Especially since shareholders will
end up paying for this executive privilege. UnitedHealth has
lost more than $17 billion of its market value since the
backdating story broke. Several companies are restating
results, facing enormous back taxes and are already
grappling with the usual opportunistic lawsuits. * * *

Which brings us to Congress, the
villain of this tale that the rest of the press corps wants
to ignore. Executive greed is an easier story to sell, we
suppose. But the same Members of Congress who most deplore
big CEO paydays are the same ones who created the incentive
for companies to overuse options as compensation.

In 1993, amid another wave of envy
over CEO pay, Congress capped the tax deductibility of
salaries at $1 million. To no one's surprise except
apparently the Members who passed this law, most CEO
salaries have since had a way of staying just below $1
million year after year. But because companies still need to
compete for and retain top talent, they have found other
forms of compensation -- notably stock options.

And one of the problems with
options is that they give executives every incentive to
capitalize all company profits back into the stock price --
thus contributing to their own pay -- rather than paying out
dividends to shareholders. As SEC Chairman Chris Cox has
noted, the 1993 law deserves "pride of place in the museum
of unintended consequences."

In a better world -- one in which
Congress kept its nose out of wage decisions -- corporate
directors could pay the salaries they wanted and wouldn't
rely so much on options to motivate executives. This, in
turn, would reduce the incentive for companies to stoop to
such dubious pay practices as option backdating. But as
long-time observers of Washington, we can say with certainty
that backdating will cease as a corporate practice long
before Congress admits its mistake.

Question
What are the accounting and tax implications of backdating employee stock
options?

The stock-options backdating scandal
continued to intensify, with the announcement by a Silicon
Valley chip maker that its chairman and its chief financial
officer had abruptly resigned. That brought to eight the number
of officials at various companies to leave their posts amid
scrutiny of how companies grant stock options.
"Backdating Probe Widens as 2 Quit Silicon Valley Firm:
Power Integrations Officials Leave Amid Options Scandal; 10
Companies Involved So Far," by Charles Forelle and James Bandler,
The Wall Street Journal, May 6, 2006; Page A1 ---
http://online.wsj.com/article/SB114684512600744974.html?mod=todays_us_nonsub_page_one

Affiliated Computer Services Inc.
acknowledged that it issued executive stock options that
carried "effective dates" preceding the written approval of
the grants, saying it plans a charge of as much as $40
million to rectify its accounting related to the grants.

The announcement followed a
preliminary internal probe at ACS, a Dallas technology
outsourcer that is also under scrutiny by the Securities and
Exchange Commission for its options practices. Between 1995
and 2002, the company granted stock options to Jeffrey Rich,
its chief executive for part of that time, that were
routinely dated just before sharp run-ups in the company's
share price, and often at the nadir of big dips.

Mr. Rich left the company last
year. A rising share price helped him reap more than $60
million from options during his tenure at the company. The
timing of his grants helped, too. If his six grants had come
at the stock's average closing price during the year they
were dated, he'd have made about 15% less.

The California Public Employees'
Retirement System is demanding a conference call with the
compensation committee of the board of UnitedHealth Group
Inc. over its disclosure practices, and is threatening to
withhold votes for board directors seeking re-election.

In a letter sent to James A.
Johnson, chairman of the UnitedHealth board's compensation
committee, Calpers board President Rob Feckner demanded a
conference call ahead of Tuesday's UnitedHealth shareholders
meeting to discuss what he called "serious threats to the
credibility, governance and performance of UnitedHealth."
Specifically, the letter criticized the company's failure to
explain how it determined stock option grant dates for Chief
Executive William McGuire and a handful of other executives
in past years, and its "inconsistent" disclosure of its
option-granting program.

The move by Calpers increases the
scrutiny of the process by which Dr. McGuire received some
of the $1.6 billion in unrealized gains he holds in company
stock options. Calpers holds 6.55 million shares, or 0.5%,
of UnitedHealth's outstanding stock. The pension fund, known
for its strong stances on corporate governance, could spur
other investors to join in its criticism. The move also
increases pressure on UnitedHealth's board to more fully
explain its past option-award practices soon, even though
its board only launched a probe into them earlier this
month.

Continued in article

After the Horse is Out of the Barn: UnitedHealth Halts Executive
OptionsThe UnitedHealth Group, under fire for the timing
of lucrative options grants to executives, said Monday that it had
discontinued equity-based awards to its two most senior managers and that it
would cease other perks like paying for personal use of corporate aircraft.
UnitedHealth’s board said it had discontinued equity-based awards for the
chief executive, William W. McGuire, who has some $1.6 billion in unrealized
gains from earlier options grants, and for the president and chief operating
officer, Stephen J. Helmsley.
"UnitedHealth Halts Executive Options," The New York Times, May 2,
2006 ---
http://www.nytimes.com/2006/05/02/business/02unitedhealth.web.html

SUMMARY: UnitedHealth Group Inc. disclosed on May 11 that
"...a 'significant deficiency' in how it administered [stock
option] grants could force it to restate results ...[and cut]
net income by as much as $286 million over that period." The
company also disclosed that the SEC is "conducting an informal
inquiry into its options-granting
practices"...UnitedHealth...said its internal review had
indicated it had uncovered 'significant deficiency' in the way
it administered, accounted for and disclosed past option grants
and that it may be required to take certain accounting
adjustments for 'stock-based compensation expense.' It said that
could reduce operating earnings by up to $393 million in the
past three years, adding that the company's management believes
that any adjustments would not be 'material'."

QUESTIONS:
1.) Summarize the issue regarding accounting for stock options
that was uncovered in a March 18, 2006, Wall Street Journal
article and that has subsequently been the subject of SEC
scrutiny.

2.) The summary description for this review quotes a
paragraph in the article describing the financial statement
effects of potential adjustments the deficiencies in
UnitedHealth's option granting practices. The paragraph begins
"In its filing, UnitedHealth, which reported $3.3 billion in net
income last year..." Identify all of the terms in that paragraph
with specific meaning for accounting and/or auditing purposes.
Define each of those terms, explain why it has specific meaning
in its use in accounting or auditing, and, if it is a relevant
point, explain why understanding that meaning helps to analyze
the impact of these options issues on UnitedHealth.

3.) Refer again to the paragraph described in question 1. The
concluding sentence states that the company management believes
that adjustments resulting from their review of options granting
practices will not be material. Contrast this point to the
comments by Professor James Cox of Duke University that "this
isn't just a little material...for this kind of issue."
Construct arguments to support one of these positions, being
sure to refute arguments potentially in favor of your opposing
side. In your answers to this and the preceding question, be
sure to address the two components of materiality in an audit
engagement.

4.) Refer to the list of companies in the table entitled "Key
Companies in Options Probes." In what industry do most of these
companies operate? Why is there industry concentration amongst
this sample of firms?

5.) What are the potential issues facing UnitedHealth's
auditors, Deloitte and Touche, regarding these matters? What
basic audit steps do you think should be carried out in relation
to any company's accounting for stock options?

6.) Do you think the situation with UnitedHealth necessarily
indicates an audit failure on the part of Deloitte and Touche?
In your answer, define the terms "audit risk", "business risk"
in relation to audits, and "audit quality."

7.) Summarize the tax implications described in the article
regarding these matters. How might adjustments to the tax
accounting for these stock options exacerbate or reduce the
impact of the adjustments to the accounting for stock based
compensation expense?

SUMMARY: Tax implications of the developing issues in stock
options, covered also in a recent Weekly Review, are discussed.

QUESTIONS:
1.) What is the recently-developing concern with dating of
executive stock options? In your answer, comment on the
Securities and Exchange Commission investigation into the issue.
You may refer to the related article for your answer.

3.) Summarize the tax implications to both executives
receiving stock options and to companies issuing stock options
if option grant dates are changed to a point when the stock
price is higher than on the originally reported date, but the
exercise price is not changed.

4.) The author quotes Mr. Brian Foley as saying that one
company under SEC and IRS scrutiny for this issue, UnitedHealth,
would have a "serious and incurable problem" if options were
"backdated" and they have been exercised. What could be the
difference between options that were exercised and options that
have not been?

5.) What are the financial reporting implications of the
problems highlighted in this article? How do the tax issues
exacerbate the financial reporting problems?

Companies that backdated
stock-option grants to top executives could face a costly
reckoning with the Internal Revenue Service, with some
potentially owing large sums in back taxes, legal experts
say.

The tax problems, which could
affect the personal tax filings of hundreds of individual
employees, are the latest wrinkle in widening inquiries into
stock-option awards.

A half-dozen companies, including
insurance titan UnitedHealth Group Inc., have said their
boards, or the Securities and Exchange Commission, are
examining their past option grants amid concerns that some
may have been backdated to take advantage of lower exercise
prices. Backdating could have resulted in millions of
dollars in extra compensation for insiders, at the expense
of shareholders. Most of the probes are preliminary, and so
far the SEC hasn't charged anyone.

If the investigations turn up
backdated grants, the companies face a host of issues,
including the prospect of earnings restatements and
delistings. Such options offer the right to buy a stock at a
fixed, or exercise, price, allowing the holder to profit by
later selling the underlying shares at a higher price than
the exercise price.

One company that has acknowledged
"misdating" options, Mercury Interactive Corp., a Mountain
View, Calif., software company, has had its stock delisted
by the Nasdaq Stock Market and has said it will have to
restate financial results. Vitesse Semiconductor Corp. last
week suspended its chief executive and two other top
officials, saying the move was related to the "integrity of
documents" in its stock-option program. Late Wednesday,
Vitesse said its board had discovered additional accounting
issues and had hired a turnaround firm.

Granting an option at a price below
the current market value, while not illegal in itself, could
result in problems of wrongful disclosure under securities
laws. Companies' shareholder-approved option plans and SEC
filings often say options will carry the stock price of the
day the company awards them or the day before.

Favorable tax treatment was one
reason that options gained popularity in the 1990s as a way
to compensate employees, particularly executives. When an
option is exercised, the company typically can take any gain
pocketed by the employee as a deduction on its tax return,
because the IRS views the option profit as akin to extra
compensation paid to the employee. The employee reports the
gain on his or her personal tax return.

Tax experts say that options
backdated to a day with a lower market price don't qualify
for a deduction -- although the disqualification only
affects options exercised by the chief executive or any of
the next four most highly compensated executives. And $1
million of each of the executives' total compensation always
can be deducted. As a result, they say, companies with
backdated options could face the prospect of shelling out
cash to revise prior years' tax returns -- and could be
ineligible for the deductions they planned to take in the
future on executive option gains.

A Wall Street Journal analysis,
published in March, described a pattern of unusual
stock-option grants to a handful of chief executives,
including William McGuire, UnitedHealth's chief executive.
Twelve grants to Mr. McGuire between 1994 and 2002 were each
dated in advance of a substantial run-up in the company's
share price, and three of them fell on yearly lows. Last
week, Mr. McGuire told investors on a conference call that,
"to my knowledge, every member of management in this company
believes that at the time we collectively followed
appropriate practices."

The potential tax issues could be
big, particularly for companies whose stocks have greatly
increased since the grants. UnitedHealth, Minnetonka, Minn.,
reported $346 million in realized option gains among its
five best-paid executives from 2003 to 2005. At the end of
last year, it said its five best-paid executives had another
$2.4 billion in unrealized, exercisable options gains.
UnitedHealth's stock has soared since the 1990s, when many
of the options were granted. A board committee investigating
options granting at the company hasn't completed its work,
and it isn't known whether any option grants were backdated
at all.

"If they had a backdating problem,
and that's a big if, the tax consequences could certainly be
ugly," says Brian Foley, a compensation consultant and tax
lawyer in White Plains, N.Y. With respect to the
already-exercised options, he added, "they would have an
obvious and serious and incurable problem."

UnitedHealth had a corporate-tax
rate ranging between 34.9% and 35.7% in the past three
years. Although the company's actual payments likely were
lower, that suggests the tax savings to UnitedHealth from
exercised executive options could have been as much as $120
million from 2003 to 2005. As of end of 2005, the value of
the future tax savings was as much as $800 million.

UnitedHealth has reported
substantial tax benefits from deducting its employees' stock
option gains. Until recently, the company said in its proxy
statements that it believed its executive option grants
qualify for the tax deduction. Starting in a proxy filed in
April 2005, it said some options might not qualify, but that
the amounts involved were immaterial. Ruth Pachman, an
outside spokeswoman for UnitedHealth, said in a statement
that the company "continues to believe" that its proxy
statements were accurate and remain accurate. She said the
company "declined to speculate about hypothetical
scenarios."

Executives at other companies
reporting options investigations, including Vitesse and
Affiliated Computer Services Inc., reported substantial
options gains to top executives. ACS, which reported about
$44 million in realized options gains by its top five
executives in the most recent three fiscal years, didn't
return calls. Vitesse officials didn't return several
messages seeking comment.

S. James DiBernardo, a partner at
Morgan, Lewis & Bockius LLP who specializes in tax issues,
says there is no easy way to make grants comply with the
terms of the tax code retroactively. A company could reprice
the options, he says, but it would have to reprice them at
the current share value, effectively erasing all of an
executive's past gains. Another route is for the top
executives to wait until after retirement to exercise the
options -- when they are no longer executive officers.

Ethan Yale, an associate professor
at Georgetown University Law Center who was retained by
UnitedHealth to look into this matter, agreed that the issue
could pose tax problems. He said this is largely uncharted
territory and ambiguities in tax rules might allow a company
to get back in compliance retroactively by repricing the
options to the actual grant-date prices.

Deloitte & Touche (USA) has updated its book of
guidance on FASB Statement No. 123(R) Share-Based Payment:
A Roadmap to Applying the Fair Value Guidance to Share-Based Payment Awards
(PDF 2220k). This second edition reflects all
authoritative guidance on FAS 123(R) issued as of 28 April 2006. It includes
over 60 new questions and answers, particularly in the areas of earnings per
share, income tax accounting, and liability classification. Our
interpretations incorporate the views in SEC Staff Accounting Bulletin Topic
14 "Share-Based Payment" (SAB 107), as well as subsequent clarifications of
EITF Topic No. D-98 "Classification and Measurement of Redeemable
Securities" (dealing with mezzanine equity treatment). The publication
contains other resource materials, including a GAAP accounting and
disclosure checklist. Note that while FAS 123 is similar to IFRS 2
Share-based Payment, there are some measurement
differences that are
Described Here.

TOKYO, May 10 (Reuters) - Japan's
financial regulator imposed a two-month business suspension
on accounting firm Chuo Aoyama PricewaterhouseCoopers on
Wednesday over its role in a book-keeping fraud at cosmetics
and textiles maker Kanebo Ltd.

In the unprecedented sanction, the
Financial Services Agency (FSA) barred Chuo Aoyama, part of
global accounting firm PricewaterhouseCoopers, from auditing
corporate accounts under Japan's securities and commercial
laws for two months beginning July 1.

Three Chuo Aoyama accountants
charged in connection with the Kanebo fraud have admitted
helping the firm hide losses as part of a nine-year effort
to disguise its financial decline. Kanebo has since been
broken up in a state-led restructuring, and rival Kao Corp.
bought its cosmetics business earlier this year.

In imposing the penalty, the FSA's
first against one of Japan's "big four" accounting houses,
the agency said the firm's failure to prevent the fraud was
a result of "serious deficiencies" in its internal controls.

The suspension will not disrupt
earnings reporting by Chuo Aoyama clients for the business
year that ended in March, which some firms have not
completed. Auditing of certain companies, such as those that
close their books later than the normal March 31 cut-off,
will also be allowed during the suspension, the FSA said.

But the auditors' clients -- a
group that includes some of Japan's biggest companies --
could abandon it for rivals in coming reporting periods.

In a statement PWC said it would
assist ChuoAoyama in its reform efforts but at the same time
establish a new independent affiliated firm in Japan that
would "adopt international best practices in accounting and
auditing."

Toray Industries Inc., Japan's top
synthetic-fibre maker, said at an earnings briefing held
before the FSA's announcement that it would consider
dropping Chuo Aoyama if the authorities penalised the firm.

Nippon Mining Holdings Inc.,
another client, said it was happy with Chuo Aoyama's work
but might consider switching if a sanction impaired its
ability to function.

The punishment comes as legislators
consider proposed legal changes that would make auditors
criminally responsible for fraud at client firms.

Accounting problems became an issue
in Japan during the long bad-debt mess at the nation's
banks. Book-keeping scandals at Kanebo and more recently at
Internet firm Livedoor Co. have brought auditors under
further scrutiny.

Kanebo, which sought restructuring
help from the government-backed Industrial Revitalisation
Corp. last year, declared about $2 billion in non-existent
profits between the 1995/96 and 2003/04 business years, a
period when it fell into negative net worth.

Kanebo said in April 2005 it had
inflated profits by exaggerating sales numbers,
under-reporting business costs and improperly removing
unprofitable subsidiaries from its balance sheet.

Its actual loss that year was in
fact only 142 billion yen, Kanebo said later in admitting
the long-running fraud. The remaining 216 billion yen in red
ink represented undeclared losses from previous years.
(Additional reporting by Yoshiyasu Shida)

SUMMARY: Japan's Financial Services Agency suspended a
PriceWaterhouseCoopers junior affiliate, ChuoAoyama
PriceWaterhouseCoopers, from performing audit work for two
months. This firm audits 2,000 big Japanese firms including
Toyota Motor Corp. and Sony Corp. The action was taken after
"finding that ChuoAoyama PwC accountants had certified
fraudulent annual reports at cosmetics make Kanebo Ltd. for at
least five years."

QUESTIONS:
1.) Define the terms "corporate governance" and "transparency."
Why are these qualities important contributors to efficient
capital markets? In your answer, also define the term "market
efficiency."

2.) Why is Japan's regulatory agency taking this stringent
action with an auditing firm? What global factors likely are
influencing the agency's actions?

3.) What does the May 1 enactment of a law requiring internal
control systems implementation accomplish in terms of
transparency and corporate governance?

4.) Many critics of Sarbanes-Oxley have argued that listing
on U.S. stock exchanges is now less attractive because of
costliness of this law's requirements. How might these
developments in Japan influence the perception of our U.S. laws?

5.) Refer to the related article. What is
PriceWaterhouseCoopers's strategy in coping with these problems
at its Japanese affiliate? In your answer, comment on auditor
changes and on the legal structure for organization of public
accounting firms.

The federal government recently
signed a deal with respirator manufacturers to stockpile 60
million disposable masks, in case of a terrorist attack or
global pandemic. But Americans should know why the feds may
not be getting the hundreds of millions of additional masks
they need to be fully prepared: the silicosis tort scam.

Most recent silicosis news has been
good, as courts have begun to expose phony claims ginned up
as a payday by unethical doctors and lawyers. Yet thousands
of bogus silicosis suits are still in court, and they are
now threatening to inflict the same sort of economic and
financial damage as did their precursor asbestos suits. This
time the litigation targets are companies vital to public
safety.

They include companies making N95
masks -- inexpensive, disposable respirators that are a
mainstay of emergency first responders, as well as
industrial and health-care workers. Tort attorneys are now
claiming the masks had defective designs or warnings and are
responsible for a near epidemic of silicosis, a dust-related
disease. Not coincidentally, this new flood of silicosis
litigation began at precisely the time Congress began
talking about cutting off the asbestos cash cow with tort
reform.

The Coalition for Breathing Safety,
an industry group, reports that between 2000 and 2004
plaintiffs attorneys filed more than 326,000 claims against
its five members. Some of these are asbestos-related,
although the recent deluge has been all silicosis. One
manufacturer (which prefers not to be named lest it become a
bigger target) says that prior to 2002 it faced about 200
silicosis claims a year. In 2003-4, it got hit with 29,000.

Medical statistics alone suggest
that the vast majority of these suits are phony. According
to the Centers for Disease Control, silicosis deaths
nationwide declined 93% from 1968 to 2002 and today account
for fewer than 200 average deaths annually in the U.S.

Respirators are also the only
safety equipment fully regulated by the government. The
National Institute for Occupational Safety and Health sets
the design standards for masks. It tests the products in its
own lab, a standard that is higher than even that applied to
the drug industry, which conducts its own medical trials.
The regulators also approve the warning-label language
attached to the devices.

This explains why respirator makers
have yet to lose a case in court. Yet this matters little to
plaintiffs attorneys, whose strategy is to assault companies
with so many claims that they can no longer afford to defend
themselves and thus must settle. The industry coalition
estimates its members have spent the equivalent of 90% of
their 2004 net income fighting suits in recent years. One
company, Mine Safety Appliances of Pittsburgh, has dropped
out of the industrial disposable market. The rest are
choosing not to invest more to meet rising demand, unable to
see the point of making more low-margin products amid
high-margin litigation risks.

Whether questionable parts ended up
in hundreds of Boeing 737s is the subject of a bitter
dispute between the aerospace company and Prewitt and two
other whistle-blowers. The two sides also have enormously
different views on what that could mean for the safety of
the jets.

The whistle-blower lawsuit is in
U.S. District Court in Wichita. No matter how it is
resolved, it has exposed gaps in the way government
regulators investigated the alleged problems in aircraft
manufacturing, according to documents and interviews.

Boeing said that the lawsuit is
without merit and that there is no safety issue. Even if
faulty parts landed on the assembly line, the company said,
none could have slipped through Boeing's controls and gotten
into the jetliners. The whistle-blowers "are not intimately
familiar with Boeing's quality management system," said
Cindy Wall, a company spokeswoman. "Our planes are safe."

Continued in article

The Big Internet Pipelines Want to Rip Off Consumers

Forwarded by David Spener

"War On The Web Robert B. Reich," May 11, 2006

Robert Reich is professor of public policy at the Richard
and Rhoda Goldman School of Public Policy at the University
of California, Berkeley. He was secretary of labor in the
Clinton administration.

This week, the House
is expected to vote on something termed, in perfect
Orwellian prose, the "Communications Opportunity, Promotion
and Enhancement Act of 2006." It will be the first real
battle in the coming War of Internet Democracy.

On one side are the companies that
pipe the Internet into our homes and businesses. These
include telecom giants like AT&T and Verizon and cable
companies like Comcast. Call them the pipe companies.

On the other side are the people
and businesses that send Internet content through the pipes.
Some are big outfits like Yahoo, Google and Amazon, big
financial institutions like Bank of America and Citigroup
and giant media companies soon to pump lots of movies and TV
shows on to the Internet.

But most content providers are
little guys. They’re mom-and-pop operations specializing in,
say, antique egg-beaters or Brooklyn Dodgers memorabilia.
They’re anarchists, kooks and zealots peddling all sorts of
crank ideas They’re personal publishers and small-time
investigators. They include my son’s comedy troupe—streaming
new videos on the Internet every week. They also include
gazillions of bloggers—including my humble little blog and
maybe even yours.

Until now, a basic principle of the
Internet has been that the pipe companies can’t discriminate
among content providers. Everyone who puts stuff up on the
Internet is treated exactly the same. The net is neutral.

But now the pipe companies want to
charge the content providers, depending on how fast and
reliably the pipes deliver the content. Presumably, the
biggest content providers would pay the most money, leaving
the little content people in the slowest and least-reliable
parts of the pipe. (It will take you five minutes to
download my blog.)

The pipe companies claim unless
they start charge for speed and reliability, they won’t have
enough money to invest in the next generation of networks.
This is an absurd argument. The pipes are already making
lots of money off consumers who pay them for being connected
to the Internet.

The pipes figure they can make even
more money discriminating between big and small content
providers because the big guys have deep pockets and will
pay a lot to travel first class. The small guys who pay
little or nothing will just have to settle for what’s left.

The House bill to be voted on this
week would in effect give the pipes the green light to go
ahead with their plan.
Price discrimination is as old as capitalism. Instead of
charging everyone the same for the same product or service,
sellers divide things up according to grade or quality.
Buyers willing to pay the most can get the best, while other
buyers get lesser quality, according to how much they pay.
Theoretically, this is efficient. Sellers who also have
something of a monopoly (as do the Internet pipe companies)
can make a killing.

But even if it’s efficient, it’s
not democratic. And here’s the rub. The Internet has been
the place where Davids can take on Goliaths, where someone
without resources but with brains and guts and information
can skewer the high and mighty. At a time in our nation’s
history when wealth and power are becoming more and more
concentrated in fewer and fewer hands, it’s been the one
forum in which all voices are equal.

Will the pipe companies be able to
end Internet democracy? Perhaps if enough of the small guys
make enough of a fuss, Congress may listen. But don’t bet on
it. This Congress is not in the habit of listening to small
guys. The best hope is that big content providers will use
their formidable lobbying clout to demand net neutrality.
The financial services sector, for example, is already
spending billions on information technology, including
online banking. Why would they want to spend billions more
paying the pipe companies for the Internet access they
already have?

The pipe companies are busily
trying to persuade big content providers that it’s in their
interest to pay for faster and more reliable Internet
deliveries. Verizon’s chief Washington lobbyist recently
warned the financial services industry that if it supports
net neutrality, it won’t get the sophisticated data links it
will need in the future. The pipes are also quietly
reassuring the big content providers that they can pass
along the fees to their customers.

Will the big content providers fall
for it? Stay tuned for the next episode of Internet
democracy versus monopoly capitalism.

Forget about the Gates Foundation.
The world's biggest charity owns IKEA­and is devoted to
interior design

FEW tasks are more exasperating
than trying to assemble flat-pack furniture from IKEA. But
even that is simple compared with piecing together the
accounts of the world's largest home-furnishing retailer.
Much has been written about IKEA's remarkably effective
retail formula. The Economist has investigated the group's
no less astonishing finances.

What emerges is an outfit that
ingeniously exploits the quirks of different jurisdictions
to create a charity, dedicated to a somewhat banal cause,
that is not only the world's richest foundation, but is at
the moment also one of its least generous. The overall
set-up of IKEA minimises tax and disclosure, handsomely
rewards the founding Kamprad family and makes IKEA immune to
a takeover. And if that seems too good to be true, it is:
these arrangements are extremely hard to undo. The benefits
from all this ingenuity come at the price of a huge
constraint on the successors to Ingvar Kamprad, the store's
founder (pictured above), to do with IKEA as they see fit.

Although IKEA is one of Sweden's
best-known exports, it has not in a strict legal sense been
Swedish since the early 1980s. The store has made its name
by supplying Scandinavian designs at Asian prices. Unusually
among retailers, it has managed its international expansion
without stumbling. Indeed, its brand­which stands for clean,
green and attractive design and value for money­is as potent
today as it has been at any time in more than 50 years in
business.

The parent for all IKEA
companies­the operator of 207 of the 235 worldwide IKEA
stores­is Ingka Holding, a private Dutch-registered company.
Ingka Holding, in turn, belongs entirely to Stichting Ingka
Foundation. This is a Dutch-registered, tax-exempt,
non-profit-making legal entity, which was given the shares
of Mr Kamprad in 1982. Stichtingen, or foundations, are the
most common form of not-for-profit organisation in the
Netherlands; tens of thousands of them are registered.

Most Dutch stichtingen are tiny,
but if Stichting Ingka Foundation were listed it would be
one of the Netherlands' ten largest companies by market
value. Its main asset is the Ingka Holding group, which is
conservatively financed and highly profitable: post-tax
profits were €1.4 billion ($1.7 billion) ­ an impressive
margin of nearly 11% on sales of €12.8 billion ­ in the year
to August 31st 2004, the latest year for which the group has
filed accounts.

Valuing the Inkga Holding group is
awkward, because IKEA has no direct competitors that operate
globally. Shares in Target, a large, successful chain of
stores in the United States that makes a fifth of its sales
from home furnishings, are priced at 20 times the store's
latest full-year earnings. Using that price/earnings ratio,
the Ingka Holding group is worth €28 billion ($36 billion).

This is probably conservative,
given IKEA's growth prospects. Sales ­ the only financial
information that IKEA releases­for the year to August 31st
2005 were €14.8 billion, 15.6% up on a year earlier. And
there is plenty of scope for more stores. Ingka Holding has
only 26 outlets in America. By contrast, in Europe, a market
of comparable size, it has over 160, accounting for more
than 80% of its total turnover. In April IKEA opened its
first store in Japan.

If Stichting Ingka Foundation has
net worth of at least $36 billion it would be the world's
wealthiest charity. Its value easily exceeds the $26.9
billion shown in the latest published accounts of the Bill &
Melinda Gates Foundation, which is commonly awarded that
accolade.

Measured by good works, however,
the Gates Foundation wins hands down. It devotes most of its
resources to curing the diseases of the world's poor. By
contrast the Kamprad billions are dedicated to “innovation
in the field of architectural and interior design”. The
articles of association of Stichting Ingka Foundation, a
public record in the Netherlands, state that this object
cannot be amended. Even a Dutch court can make only minor
changes to the stichting's aims.

If Stichting Ingka Foundation has
net worth of at least $36 billion it would be the world's
wealthiest charity

The Kamprad foundations compare
poorly with the Gates Foundation in other ways, too. The
American charity operates transparently, publishing, for
instance, details of every grant it makes. But Dutch
foundations are very loosely regulated and are subject to
little or no third-party oversight. They are not, for
instance, legally obliged to publish their accounts.

Under its articles, Stichting Ingka
Foundation channels its funds to Stichting IKEA Foundation,
another Dutch-registered foundation with identical aims, and
which actually doles out money for worthy interior-design
ideas. But the second foundation does not publish any
information either. So just how ­ or whether ­ Stichting
Ingka Foundation has spent the €1.6 billion that it
collected in dividends from Ingka Holding in 1998-2003
remains hidden from view.

IKEA says only that this money is
used for charitable purposes and “for investing long-term in
order to build a reserve for securing the IKEA group, in
case of any future capital requirements.” IKEA adds that in
the past two years donations have been concentrated on the
Lund Institute of Technology in Sweden. The Lund Institute
says it has recently received SKr12.5m ($1.7m) a year from
Stichting Ikea (which also gave the institute a lump sum of
SKr55m in the late 1990s). That is barely a rounding error
in the foundation's assets. Clearly, the world of interior
design is being tragically deprived, as the foundation
devotes itself to building its own reserves in case IKEA
needs capital.

Although Mr Kamprad has given up
ownership of IKEA, the stichting means that his control over
the group is absolutely secure. A five-person executive
committee, chaired by Mr Kamprad, runs the foundation. This
committee appoints the boards of Ingka Holding, approves any
changes to the company's statutes, and has pre-emption
rights on new share issues.

Mr Kamprad's wife and a Swiss
lawyer have also been members of this committee, which takes
most of its decisions by simple majority, since the
foundation was set up. When one member of the committee
quits or dies, the remaining four appoint his replacement.
In other words, Mr Kamprad is able to exercise control of
Ingka Holding as if he were still its owner. In theory,
nothing can happen at IKEA without the committee's
agreement.

That control is so tight that not
even Mr Kamprad's heirs can loosen it after his death. The
foundation's objects require it to “obtain and manage”
shares in the Ingka Holding group. Other clauses of its
articles require the foundation to manage its shareholding
in a way to ensure “the continuity and growth” of the IKEA
group. The shares can be sold only to another foundation
with the same objects and executive committee, and the
foundation can be dissolved only through insolvency.

Yet, though control over IKEA is
locked up, the money is not. Mr Kamprad left a trapdoor for
getting funds out of the business, even if its ownership and
control cannot change. The IKEA trademark and concept is
owned by Inter IKEA Systems, another private Dutch company,
but not part of the Ingka Holding group. Its parent company
is Inter IKEA Holding, registered in Luxembourg. This, in
turn, belongs to an identically named company in the
Netherlands Antilles, run by a trust company in Curaçao.
Although the beneficial owners remain hidden from view­IKEA
refuses to identify them­they are almost certain to be
members of the Kamprad family.

Clearly, the Kamprad family pays
the same meticulous attention to tax avoidance as IKEA does
to low prices in its stores

Inter IKEA earns its money from the
franchise agreements it has with each IKEA store. These are
extremely lucrative: IKEA says that all franchisees pay 3%
of sales. The Ingka Holding group, the company owned by the
Kamprad foundation, is the biggest franchisee, with its 207
stores; other franchisees run the remaining 28 stores, which
are mainly in the Middle East and Asia.

How much money does Inter IKEA
Systems make? Its results are included in its parent
company's accounts filed in Luxembourg. These show that in
2004 the Inter IKEA group collected €631m in franchise fees
and made pre-tax profits of €225m. This profit is after
deducting €590m of “other operating charges”.

Although IKEA would not explain
these charges, because its policy is not to comment on the
accounts of a private group of companies, Inter IKEA appears
to make large payments to I.I. Holding, another
Luxembourg-registered group that is almost certain to be
controlled by the Kamprad family and which made a profit of
€328m in 2004.

Together these companies had nearly
€11.9 billion in cash and securities at the end of 2004,
even after I.I. Holding paid out a dividend of nearly €800m
during the year. Most of this money has undoubtedly come
from the collection of franchise fees. In total, these two
groups suffered tax bills of a mere €19m in 2004 on their
combined profits of €553m. Clearly, the Kamprad family pays
the same meticulous attention to tax avoidance as IKEA does
to low prices in its stores.

The IKEA financial system of
stichtingen and holding companies is extremely efficient.
Even so, next time you wonder how anyone could have come up
with the fiendish plans for a Hensvik storage unit or a
Bjursta sideboard, spare a thought for the Kamprads'
accountants.

HealthSouth Corp. founder Richard
M. Scrushy was convicted of paying $500,000 in bribes in
return for a spot on a state regulatory panel, a victory for
the federal government a year and a day after it failed to
pin a massive accounting fraud at the health-care company on
him.

The guilty verdict on all six
charges against the 53-year-old Mr. Scrushy, including
bribery, conspiracy and mail fraud, could put him behind
bars for as long as 20 years, though the judge has wide
discretion on sentencing. Prosecutors and defense lawyers
are likely to argue over how to weigh factors such as Mr.
Scrushy's background and the size of the contributions for
which he was convicted. Sentencing isn't expected until this
fall at the earliest.

The Montgomery, Ala., jury also
convicted former Alabama Gov. Don Siegelman on 10
political-corruption-related counts, six of them linked to
Mr. Scrushy. During the two-month trial, prosecutors alleged
that Mr. Scrushy arranged two hidden $250,000 payments to a
lottery campaign backed by Mr. Siegelman, who put the
then-chief executive of HealthSouth on a board that approves
hospital-construction projects. The charges weren't related
to the accounting fraud.

It wasn't clear what swayed jurors
after 11 days of deliberation, or ended a deadlock that
emerged last week. Mr. Scrushy's defense team clearly failed
to win over the jury with its strategy of comparing him to
civil-rights icons who suffered injustice. In his closing
argument, Fred D. Gray, who represented Rosa Parks when she
was arrested in 1955 for refusing to give up her seat on a
Montgomery bus, quoted a favorite Biblical passage of Martin
Luther King Jr., adding that an acquittal of Mr. Scrushy
would mean that "justice will run down like water and
righteousness as a mighty stream."

Federal prosecutors denounced the
rhetoric as a racially motivated attempt to influence the
jury of seven African-Americans and five whites, the same
composition as the jury that acquitted Mr. Scrushy last
year. They alleged that Mr. Scrushy had used his money and
power to gain political influence that helped fuel
HealthSouth's growth. Mr. Scrushy was forced out at
HealthSouth when the accounting fraud surfaced in 2003.

Charlie Russell, a spokesman for
Mr. Scrushy, said the former HealthSouth CEO was "shocked"
by his conviction. "He maintains that he is absolutely
innocent, and he intends to appeal." Before the trial, Mr.
Scrushy's lawyers fought unsuccessfully to have him tried
separately and objected to the makeup of the jury pool.

In a statement, Louis V. Franklin
Sr., criminal-division chief of the U.S. attorney's office
in Montgomery, said the verdict "sends a clear message that
the integrity of Alabama's government is not for sale."
HealthSouth said Mr. Scrushy's conviction "has no impact on
the company," which continues to pursue a turnaround
strategy under new management. HealthSouth has filed a
lawsuit against him in connection with the fraud, while Mr.
Scrushy has sued the company for wrongful termination and
breach of contract, citing his acquittal in last year's
trial. Mr. Scrushy also faces fraud-related civil lawsuits
filed by shareholders and the Securities and Exchange
Commission.

Doug Jones, a former U.S. attorney
now representing HealthSouth shareholders in a suit against
Mr. Scrushy, said the verdict could help plaintiffs in the
remaining cases because Mr. Scrushy likely will be forced to
answer questions about his conviction. Sean Coffey, a lawyer
representing bondholders, added, "Even though it's not
directly related, the folks we represent can't see enough
hurt get on that guy."

Jurors acquitted the two other
defendants, Paul Hamrick, a onetime chief of staff to the
former governor, and Gary Roberts, former head of the
Alabama transportation department.